Why Anthony Aboud isn’t shorting the Big Four Banks

Note: This interview was recorded on Wednesday 6 November 2024.

Almost all of the investment world is negative on the big banks and there are sell ratings from most brokerages. But Perpetual’s Anthony Aboud is not shorting the Big Four. Quite simply, the banks fail to meet his criteria for shorting.

“There are a lot of expensive companies. Valuation shorts in isolation have never really worked terribly well, you need to have something else going against,” Aboud says.

Aboud points to the high quality of the banks, the slight earnings upgrades in a tough environment and his view that “the operating environment is pretty good for the next 12-18 months”.

In short, the banks might look expensive, but there isn’t anything fundamentally wrong with them that would warrant a short position.

The 7 red flags Aboud looks for in a short position

When it comes to taking a short position, Aboud looks for a range of red flags.

“We feel that the company knows the problems either consciously or subconsciously before the rest of the market does,” he says.

The red flags he looks for include:

1. Insider selling
2. Turnover of management
3. Large turnover beneath the management level
4. Aggressive accounting
5. A bad acquisition or one that doesn’t make sense
6. CEO behaviour
7. Strategic reviews or change in objectives every six months

He’s seeing short opportunities in the mid-cap space across the ASX, given we’re in a momentum market.

“Just because something’s expensive and hot doesn’t mean we short it,” he reiterates to investors, noting he is watching a retailer with international growth that has just had its highly popular CEO leave.

Where the opportunities lie

Management behaviour can also be a green flag for Aboud to take a long position.

“It doesn’t matter how tough an industry is, if you’ve got a good management team, they can do very well over long periods of time,” he says.

He shares the example of Eagers Automotive (ASX: APE) which had a contrarian approach and purchased its biggest competitor during the recession.

When it comes specifically to what he’s seeing in markets today, he thinks there are better opportunities in the smaller end of town, with energy featuring strongly as a theme and sector to watch.

While he’s wary of lithium, he sees opportunities for rare earths, copper and iron ore miners in the coming years, particularly from the green transition along with the AI transformation. He holds long positions in Iluka Resources (ASX: ILU), Capstone (ASX: CSC) and Champion Iron (ASX: CIA).

In keeping with his interest in the AI transformation, Aboud is highly selective on opportunities at this point. As he puts it, he’s “watching but not doing a lot at this point in time.”

“The most exciting opportunities are going to be which companies, which corporates, can use whichever generative AI to increase productivity, and where they are going to end. 

Who is going to end up with the economics – the customer, the corporate, or is it going to end up with the hyperscaler?” Aboud says.

He believes Goodman Group (ASX: GMG) is well positioned and has held it for three years but is watching and waiting to see which companies emerge as top picks in the future.

In this episode of Views from the Top, Aboud discusses market valuations and why investors need to think beyond whether something is expensive or not, where he sees opportunities and where there is froth for shorters to take advantage. He also shares why CEOs and investors alike need to "plant trees they won’t see grow”.

Time codes

0:00 - Introduction
0:23 - Anthony Aboud's greatest investment lesson
2:29 - Managing long/short positions in the current environment
3:43 - How to find the best stocks
5:20 - Red flags for short positions
6:58 - Energy and mining views
7:55 - Opportunities in the market
10:25 - Bank valuations and why he isn't shorting
12:09 - Where Anthony Aboud is seeing froth
13:43 - What are investors getting wrong in the market - and what do they need to get right
19:53 - Opportunities from the AI transformation
20:54 - What the news around Perpetual has meant for the team

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