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1. Here Comes Another Hike

Source: Shutterstock

This week's hot topic was the unexpected surge in Aussie inflation. May's headline inflation rate jumped to 4.0%, surpassing April's 3.6% and market expectations of 3.8%. This marks the fastest increase since November 2023.

The ASX 200 fell -0.7% on Wednesday, and another -0.3% on Thursday as investors grappled with the economic implications.

Analysts are now very confident that the RBA will hike in August. Here are some of the key takeaways from their post-CPI reports: 

• Morgan Stanley – “Across most measures, the broad story remains consistent though - inflation has not slowed at all this year from a ~4% rate, either in annual terms or sequentially … We think this risk has now crystallised and forecast a hike in August to 4.6%.”

• Morgan Stanley – “Should our additional rate hike call become consensus, the potential harder landing that comes with that is not priced into earnings multiples in our view and will pressure Index direction.”

• UBS – “Our new CPI forecasts make a rate hike in  August a ‘close call’ … However, we see enough evidence to change our base case view. Hence, we now expect the RBA to hike the cash rate 25 bps in August to 4.6%.”

• Citi – “We believe the Board will be forced to hike by another 25 bps in the August Monetary Policy Meeting …”

• Citi – “Though risks are tilted towards another hike if inflation doesn’t behave according to the Bank. The RBA is now in serious risk of not hitting its inflation target by the end of 2025. Overall, we still see 100bps worth of rate cuts next year starting Q1, with risks of it occurring later in the year.”

2. EOFY Ideas

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Macquarie has come up with a two-step strategy for the new financial year – Buy stocks with weak momentum and sell stocks with no earnings growth.

The strategy seeks to benefit from predictable seasonal effects around year-end, which include:

• June – Stocks with low momentum and high risk tend to underperform as investors seek to minimise Capital Gains Tax liabilities. In contrast, stocks with good momentum and low volatility tend to outperform in June.

• July – These trends often reverse in July as investors adopt a longer-term perspective and become more risk-tolerant.

The report pointed to BlueScope, Worley and Karoon Energy as ASX 200 stocks that fell at least 5% in FY24 with above-average volatility.

It also said to avoid or reduce stocks like Wesfarmers and the Big Four Banks as their recent outperformance lacks any fundamental backing. “This basket of stocks may be kept for year-end window dressing, but the banks in particular have fundamental challenges,” the report said.

3.  Guzman y Gomez vs. Peers

Source: Guzman y Gomez

A week on and Guzman y Gomez is surprisingly still hovering around the $29.50 level.

The company’s expensive valuation (32-times FY25e EBITDA) has attracted a lot of attention to peers – which trade at dramatically lower multiples (generally around 10-times FY25e EBITDA).

The Australian has flagged Retail Food Group as a potential takeover candidate as it “appears cheap against recently listed Guzman y Gomez”. The article cited Ampol as a potential buyer as well as private equity names like PAG and Adamantem Capital. 

But let’s take a closer look at how Guzman y Gomez stacks up against Retail Food Group.

• Market cap: $3bn vs. $200m

• Lease liabilities: Approx $1m vs. $100,000

• FY24 revenue forecast: $339.7m vs. $114m

• Avg store revenue: $4.5-5.5m vs. $600-700,000

• FY24 EBITDA forecast: $25.4m vs. $30m

• Stores: 185 in Australia vs. 562 across main brands

These two companies present contrasting narratives. One is touted as a growth powerhouse, expected to roll out 1,000 stores over the medium term. The other is emerging from the trenches, with its share price down around 98% from 2016 highs.

4. Cettire’s Flash Sale

60% off stock with 50% of shares ... (Source: Cettire)

Cettire has to be one of the dodgiest companies on the ASX. The stock experienced a 49% one-day selloff on Monday after downgrading its FY24 earnings. This follows a whole heap of insider selldowns, US tax allegations and headwinds for the luxury goods market. 

Twitter user taxlosstrades writes up a good read about the company’s US tax allegations (and I’m pretty sure he’s shorting a boatload of shares too) – You can read his research here

The trading update outlined expectations of FY24 EBITDA between $32-35 million or 22-29% below consensus. This trading update only mentioned three metrics: Sales revenue, marketing-to-sales ratio and adjusted EBITDA.

In the previous quarter, Cettire quoted more than seven additional metrics including gross revenue, margins, average order value, active customers, US sales taxes and more.

It gets even more spicy as Founder and Chief Executive Dean Mintz offloaded $127 million worth of shares in March at $4.63 a piece. 

5. A New CEO – At What Cost? 

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The Star Entertainment Group finally locked in a new CEO – Steve McCann – the former Chief Executive of Crown Resorts and prior to that, the Chief Executive of Lendlease.

It almost feels like The Star offered him a blank cheque. His employment agreement is simply eye watering amounts of dosh.

• Fixed remuneration: $2.5 million per year

• Sign-on bonus: $2.5 million

• Sign-on performance rights: 200% of his fixed remuneration ($5 million) as performance rights – these will vest three years after his commencement, subject to Mr McCann not resigning or being terminated

• Short-term incentive (FY25-26) : $2.5 million per year

• Retention payment (FY26) $2.5 million 

• Short-term incentive (FY27 and beyond): 100-150% of his fixed remuneration, subject to performance hurdles

• Trigger event bonus: If a trigger event occurs within the first two years of his employment, he will be entitled to receive any unpaid remuneration (fixed, incentives and bonuses). A trigger event includes takeovers, falling into voluntary administration etc.

Oh and of course, he’ll have access to free parking and accommodation at The Star, Sydney. 

What’s even more crazy is that The Star is forecast to be loss-making over the next couple of years. Macquarie’s estimates FY24-26 to report net profit after tax of -$4m, -$19m and -$16m respectively.

Let’s see if this “throwing money at the problem” strategy will fix anything.

6. Red Flags and P-Values

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Navigating the biotech sector can be treacherous for investors. While some companies genuinely advance their trials and succeed, others stagnate for years. Two critical red flags deserve attention:

1. Capital Raise Timing: Microcap biotechs often release positive news to boost their share price and then enter a trading halt to raise capital. This strategy minimises dilution as the company's valuation increases. However, initiating a capital raise before an impending trial result can be a warning sign. It may indicate management's lack of confidence in the upcoming data.

2. Devil in the Details: Careful scrutiny of announcements is crucial. For example, Immutep's shares plummeted 47% after releasing results for its TACTI-003 cancer treatment candidate. While the announcement appeared positive at first glance, it omitted the p-value – a critical measure of statistical significance essential for regulatory approval. In other words, their findings were not significant. In contrast, trial results from Neuren report p-values at the very top, implying the statistical significance of Trofinetide in Rett syndrome trials.