In the interview below, Alec Hogg asks Richard Hirsch of Standard Bank how investors and traders should interpret the latest quarterlies from major US corporates. Perhaps, as Hirsch advises, Google is the perfect trade while he believes those who don’t have Apple are missing out on a great value investment. – Tracey Ruff
This special podcast is brought to you by Webtrader and Richard Hirsch, from Standard Bank Online Share Trading, is with us to talk international markets. Last night, Janet Yellen was telling us that bonds are going to go up. They’ve been down. Bond yields are going to go up, which means prices are going to go down, which means shares will be under some kind of pressure. What’s your reading of all this?
Yes, I think for a while we felt that the global markets are actually a little bit stretched, Alec. If you have a look at the evaluations, S&P trading around 18. Our ALSI trading well above its historic PE, so I think a little bit of softness is to be expected, and we’ve seen that coming into the last few weeks. We’ve seen our market come off around 2000 points – the S&P being a little bit softer. I think these types of… Let’s not call them sell-offs. Let’s just call them mini-corrections. I think our healthy markets can’t just keep running all the time. People have become quite accustomed to markets just running and running, and you have to have a little bit of a breather sometimes and a little bit of volatility, unfortunately, for investors.
So is it a good time to start building cash?
I don’t know about building cash. I would certainly think that there’s a lot of cash still sitting on the sidelines that’s missed this rally in these markets, and I would say you start entering in piecemeal. In a sense, if you’ve got a million Rand to invest or a $100.000.00 to invest, you start coming in, maybe at ten percent or a 15 percentage of that at a point and you get an entry. If the market comes lower, you enter again because you are never going to catch the bottom and if you’ve been left behind, you’re going to get another chance. You are always going to get another chance with these markets.
It’s an interesting point that you make there about phasing in your investments. When we started our portfolio – the Biznews Global Share Portfolio – we did the same thing. We phased it in over three months. Is it a good time period for you or what do you advise, particularly the way markets are looking at the moment, for someone who has got $100.000.00, for example? They want to get involved in Webtrader. Clearly, they mustn’t go and invest it all today.Â
Most certainly not. I would say three to six months is probably not a bad time to phase it in and you do it every month. You make it more a date phase-in, rather than a level phase-in, in my mind. You could take a specific week of each month, and you look to get involved at that level and you just enter the market that way. You’re getting another chance in these markets. I still am a big believer in these equity markets, especially with QE in Europe, Europe looking to turnaround. America, still the engine room of the world, looking very, very healthy, so this type of correction is to be expected and should be used as an opportunity.
You said the market. Individual shares or Exchange Traded Funds?
I would say, for the South African investor on Webtrader, I would say the majority of your funds should be going into exchange-traded funds. You certainly can buy excellent exchange-traded funds over the S&P, the Dow, or the FTSE, whichever exchange you want to have exposure to.
So, that’s buying the whole market, when you say the FTSE, the buying of the whole of London.
Correct.
Rather than trying to just get individual winners.Â
Correct. I would say the majority of your portfolio goes towards that because you’re not going to be…or people today, would not be as in touch as they are with the local markets. Whether it’s Google, or its Apple, or its Berkshire Hathaway or whatever it maybe. I still think you get the performance of the market and the S&P 500 has performed extremely well, and still, I believe, will still continue to perform well and you put the majority of your portfolio into that, on a long term investment. Then you certainly can mix it up with a couple of shares. We see the majority of our clients still trading in Apple, Google, Facebook, the social media space or the text space, and I certainly don’t think that that’s over by any means. I think Apple coming off from a mid-$130s to mid-$120 should certainly be looked at. I think that company just continues to soar. I think the iWatch is going to be much more successful than people maybe anticipate and I think you could see Apple north of $150.00/$160.00 in a couple of years’ time, without a doubt.
That’s an interesting point because every quarter the big, international stocks release results. They tell us exactly how they are doing in that time. If those results are ahead of expectations, like something like, in our portfolio we had Novo Nordisk, which shot up 17 percent. We had Amazon.com, we’ve had two sets of quarterlies that have really kicked hard, the share price, in the right direction. After the previous set knocked it down, so it’s almost like if you stay in… If you see a share that you own that jumps seven percent one day. You seem to pay attention.
Without a doubt and I think the scale of what America or how America is performing is something that attracts me, and that you need to stay invested in. I think our market, a lot of the evaluations look pretty stretched. I know the S&P 500, as we mentioned earlier, is on 18 times but I still think America is going to perform and I still think the quality in America is going to perform.
Richard, there have been some interesting quarterly results.  The most recent of these was last weekend, Berkshire Hathaway. Warren Buffett got his usual 30,000 plus pilgrims to go to Omaha, to go and listen to what he had to say. I didn’t make it this year but are you happy with the results?
Were you feeling left out?
Not really, hey. Funny, I’ve been… I think I’ve been eight times and this was the year to go, but we had other priorities here, at home, so I had to stick around but I’m certainly following what Warren Buffett is saying and also looking at Berkshire Hathaway as a whole. It’s a big chunk of our portfolio, 15 percent of our portfolio. Do you think it’s a safe place to be still?
Yes, I think it is a relatively safe place to be. You’ve got to back the track record. You’ve got to back the man. You’ve got to back his investment committee. I think if you have a look at the earnings. The earnings were still up ten percent. That’s on a forward PE of 18 times, which is in line with the S&P 500. Operating earnings were actually up 20 percent and I think, even though it’s not the cheapest stock in the market, I don’t know if there really are that many cheap quality Blue Chips any more. Apple is more on like a ten or a 12 times PE, so it’s a little bit cheaper but I think, staying in Berkshire, you’re not going to go too wrong.
You seem to be quite excited about Apple.Â
I am. If you have a look at the cash pile that they continue to build every single quarter. I think there’s a lot of innovation still to come, out of Apple and I think Apple is going to be a $200.00 share.
Is that your share pick of the moment? It’s funny I think it’s the biggest, and the most valuable company on earth, as you say ten to 12 PE, which is not expensive by just about any standards. Is it because it is so big that people are a little bit scared that it hasn’t got too much runway?Â
Yes, I don’t know if people are scared. If you have a look at how it’s performed and how it continues to perform. The results speak for themselves. Markets will do what they need to do but the valuation of Apple and the cash pile just continues to attract me, and the cash generation continues to attract me. I think they’ve also only scratched the surface in China, hey Alec?
Yes, it does look like it. They are now starting to sell iPhones there, hand-over-fist. The stock that we do have in our portfolio is Google, another one of the international tech giants, as Apple would be. Their quarterly results: what did you make of them?
Yes, I thought their quarterly reports were good. They were up 17 percent. They were slower than the fourth quarter of last year, so they did slow down a little bit but their operating margin is tremendous. It’s about a 40 percent operating margin, and I think YouTube is well positioned. I actually had a look before I came into the studio, on Bloomberg’s, in terms of the analysts’ recommendations. There are 15 analysts that cover Google, 13 buy two holds, with an average target price of $642.00. For the listeners that aren’t aware that’s trading at around $535.00, so you’ve got over 20 percent upside in that stock and 18 times forward PE. You can’t live without Google. For me, you’ve got to stay invested as well.
And a business model that no one’s been able to overturn. It was interesting, a couple of years ago, at the Berkshire Hathaway meeting. Warren Buffett was asked about the Google business model and he said he’d spent time with Bill Gates, and he is clearly his great friend, who he plays poker with every Wednesday night online. They’ve been analysing that business model and they can’t find a crack in it. So if they can’t, who can?Â
And it is also for… You know, we have investors that are long term but then you also have speculation and you also have derivatives. Derivative products like CFDs that are offered on Webtrader. Google, if you go and have a look, is in an excellent trading range of around about $525.00 to about $560.000, and it’s towards the bottom of that trading range. So if you get a bit more weakness in these markets. You could be picking your Googles up at $520.00 to $525.00, and certainly worth a dabble, in the CFD as well.
Unlikely to be dropping or certainly there’s a good flaw there. Richard Hirsch is with Standard Bank Online Share Trading and this special podcast was brought to you by Webtrader.Â