IRISH SHARES: REVIEW OF ALL PAST RECOMMENDATIONS & NEW UPDATE
25th October 2022
The very first article on Irish shares, was posted on the free website at www.sextonreadsthecharts.com in October 2019 titled 'What is wrong with the banks?'.
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That article explained that the stop/start recovery in the Irish bank shares, post the 2008 financial crisis, was due to the extraordinarily low level of interest rates. This reduced the scope of the banks to make their usual profit margin, being the difference between the interest rate charged on loans versus the interest rate given to depositors.
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The article also explained that the banks' interest rate margins were further damaged by the 'inverted yield curve', the latter being the term that describes a situation where short term interest rates are higher than long term interest rates. Banks borrow short term (by taking in deposits) and lend out long term (on issuing loans with repayment schedules of up to 20 years). Therefore, banks need an upward yield curve (where short term interest rates are lower than long term interest rates) to make a profit.
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The yield curve turned downwards on a few occasions, post the 2008 financial crisis, due to massive buying of government bonds by the European Central Bank (and similarily by the Federal Reserve), to keep interest rates down at a near zero level - a strategy called 'quantitative easing'.
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The article concluded that while the yield curve had once again turned upwards, it could be some time before interest rates were allowed to rise significantly by the world's most powerful central banks, due to anemic economic growth.
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Everything changed with Vladimir Putin's invasion of Ukraine in February 2022. The resulting hike in oil prices drove up the rate of inflation. The quantitative easing era is now over, and central banks are hiking up interest rates in an effort to subdue inflation. By raising interest rates, they aim to curtail and ultimately reduce consumption, thereby driving down inflation.
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And so the yield curve for interest rates is now sharply upward, with long term interest rates significantly higher than short term interest rates. That is good for bank earnings, and the bank charts duly turned positive in March 2022, pointing us in the right direction here.
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The next article that featured the Irish bank shares was posted on the member's website at www.srtcmembers.com in March 2022, noting that the charts for AIB, Bank of Ireland and Permanent TSB had all turned positive, and explaining why this had happened. They were trading at €2, €5.80 and €1.63 respectively, and are now trading at €2.91 (+ 45%), €7.26 (+ 25%) and €1.62 (u/c). The latter two were preferred, as they had stronger charts, and were recomended.
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That recommendation is now looking quite precient, given their outperformance in a market that has tanked since then (but would have been even better if AIB were included). However, AIB was recommended in an email to members in December 2020 (accompanying the notification of an update of the Irish Shares charts), noting that the chart had turned bullish with the price at €1.47. It subsequently rose 68% in less than 6 months, and is curently up 98% from that price.
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AIB and Bank of Ireland continue to have bullish charts. Permanent TSB gets a slightly lower rating of a 'moderately bullish' outlook, due to the resistance level at €1.70 (a breakthrough that level would be very positive for the stock). All three are now recommended, due to the more favourable interest rate environment for banks in general.
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The next set of Irish share recommendations was posted on the member's website in July 2020, and these proved to be less durable. The charts for 3 out of the 4 stocks recommended, did not remain on the recommended list for long, as the charts subsequently turned bearish (Flutter, Kingspan & Greencoat Renewables). Recommended at prices of €127.50, €63 & €1.26 respectively. Sales subsequently recommended resulting in gains or losses of - 1%, + 6% & - 4%, so no real damage done here.
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The sole surviving stock from that batch of receommendations made in July 2020 is Kerry Group trading at €106.70 at that time. The recently completed technical analysis of all Irish shares, concluded that the chart for Kerry Group had turned bearish, with the price now at €90.92. Notwithstanding the stellar track record of that company, it is best to heed the chart signal here and a sale is recommended.
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A short seller was reported to be active in Kerry Group shares last year, and I wrote a lengthy article in April 2021 investigating their argument that the shares were overvalued. I concluded that the accounting policies were aggressive, but no more aggressive than those of most acquisitive companies.
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However, rising interest rates will hurt acquisitive companies in two ways. Firstly, attractive targets will be more difficult to find, as the hurdle rate caused by higher financing costs will render many of these as being uneneconomic to acquire. Secondly, in assessing whether or not a writedown of the carrying value of previous acquisitions is appropriate, the company will be forced to be more conservative (as projected cash flows from these will be discounted by a higher interest rate).
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I did note that the accounting policies of Glanbia were more conservative than Kerry's. That was one of the reasons for recommending it, in an article posted on the member's website in March 2021, with the share price standing at €12.40. The chart remains bullish, with the shares now trading at €11.43, down 8%, which is a reasonable performance given the downturn in markets in the intervening period, so Glanbia remains on the recommended list.
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A further three Irish stocks were previously recommneded. CRH (at €42.91 in July 2021), Grafton Group (£13.03 in August 2021) and Datalex (€0.84 in April 2022).
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The problem child here is Grafton Group which has fallen to £6.73. In my last follow up, I recommneded holding it, despite the chart turning bearish, as fundamental analysis revealed that it has a very strong balance sheet. However, it is no longer as attractive a target for a private equity fund now, given the new trend of rising interest rates. The chart is now indicating a moderately bearish outlook, as there is a support level at £6.70. That factor, together with the strong balance sheet, provides comfort to investors holding it. However, I must now deem it to be a 'sell', to maintain the discipline of adhering to the signals provided to us by the charts.
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CRH still has a bullish chart, despite falling to €34.73 so it stays on the recommended list, and it is too early yet to asses Datalex.
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My reviews of the fundamentals of Greencore (£1.32 in September 2021), Smurfit Kappa (€48.90 in August 2021) and RyanAir (€15 in March 2021) concluded that the outlook was negative for all three - overly aggressive accounting policies being the main negative indicator for the latter two. With these shares now trading at £0.64, €31.95 and €11.18 respectively, readers were well served by avoiding these stocks.
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The change in market conditions from bullish to bearish in the first quarter of 2022, did of course impact on the outcome to date for all of the above recommendations. It is worth noting, however, that matters such as overly optimistic accounting policies, which are often overlooked in a bull market, tend to come to the fore in a bear market, as investors become more skittish.
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The recent update of the charts for all of the Irish Shares revealed the following to have bullish charts:-
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1. AIB
2. Bank of Ireland
3. Corre Energy
4. Donegal Investment Group
5. FBD
6. Flutter Entertainment
7. Glanbia
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I have concluded that AIB, Bank of Ireland and Glanbia should remain on the recommended list, due to the factors outlined above.
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Corre Energy is a new stock on the market, so it is probably too early to draw any major conclusions from its bullish chart. Donegal Investment Group is a very illiquid stock, so it is very difficult to buy or sell. FBD's share price movements in the past have been quite erratic, so it may be prudent to wait for more evidence that a new bullish trend is in place. Likewise for Flutter Entertainment where the chart has gone from bullish, to bearish, to bullish again.
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A further six stocks were deemed to have moderately bullish charts. This included CRH and Permanent TSB both of which were previously recommended on this site, and I will retain these on the recommended list. The article posted on CRH in July 2021 on this website, remains relevant notwithstanding the change in the overall market trend from bullish to bearish. Permanent TSB gets the nod due to the favourable impact for all banking stocks of rising interest rates.