Looking for winners

Published in the Herald Sun, September 2011 by Karina Barrymore

Many traditional high-profile stocks face tough times - analysts

Now all the profit season bogies are out of the closet, share investors are turning their focus back to the best value stocks and perhaps weeding out a few nonperformers.

Trying to get your portfolio back into shape while financial markets are still extremely volatile is a challenge even the expert fund managers are struggling with, as they are forced to find a home for millions of dollars of compulsory superannuation contributions every day.

At least Australia has escaped the crippling debt problems other countries are dealing with, although our unique two-speed economy is still managing to unhinge some of our highprofile and blue chip investment targets.

In many cases, choosing the right stock to invest in during the current cycle is not about picking a surefire winner but about avoiding the biggest losers.

Wealth Within analyst Dale Gillham says it is definitely time for caution. 

"This is especially so for those with a short-term view, as picking stocks right now could be as dangerous as trying to catch a falling knife," Gillham says.

Investment manager UBS strategists David Cassidy and Dean Dusanic  agree "it's tough out there" for many stocks.

The strategists have coined the phrase "structurally challenged industrials" which sums up the hurdles ahead for many of our traditional large companies. 

Typically, these former share market favourites are facing problems from being exposed to the impact of our strong dollar and our twospeed economy, Cassidy says.

The rapid rise in the currency and soft demand in almost every sector except resources, is playing havoc with company fortunes and their share prices.

Not only does the high Aussie dollar make Australian-made products more expensive for overseas buyers but it also pushes local buyers to shop on the internet and spend their retail dollar overseas too, Cassidy says.

So let's take a look at the prospects of some of the "structurally challenged" stocks.


This company's earnings decline is mainly a currency problem, Cassidy says, with earnings in a downgrade mode since early 2010.

But it is one of the best stocks and is ready to improve when the Australian dollar falls, the UBS strategist says.

The stock is trading at its lowest price since listing in Australia, which could indicate a bargain, but Gillham says, unfortunately, there are no signs that the current fall will stop. "As such, avoid this one," he says.


The company's very disappointing profit and difficulties in several of its major markets indicate continued tough times ahead.

To help improve earnings it is reducing inventory and closing some loss-making businesses. Gillham and Cassidy agree this company's fortunes are heavily pegged to the fate of the Aussie dollar.


"Boral is a rock in a hard place," Gillham says, with 75 per cent of Americans believing their economy will get worse and four out of five Australians believing there will be a second GFC.

However, there could be some growth for the construction company in Asian markets. 

Gillham thinks it is too early to buy into Boral, but Cassidy expects Boral to be among those companies that stand to benefit most from an interest rate cut.


The company is restructuring its business into Asia to reduce its cost base and take advantage of growth in this region.

The airline has forecast positive growth in this financial year. The Qantas share price hit an all-time low during the GFC and is again challenging that level, Gillham says. 

"If it manages to stay above $1.38 and starts to rise, this may just be a bargain for long-term investors," he says.


A sceptical investment market is not convinced about the prospects of Toll's Asian and global strategy, Cassidy says. 

Earnings estimates have been slipping since March.

Toll needs an interest rate cut to start to improve its prospects, the analysts say. 

"Being in transport and logistics, this stock's share price will benefit quickly from any increase in consumer confidence," Gillham says.


UBS puts this company as among the best overall in the risk-return trade-off from the group of companies it identified as structurally challenged.

But Gillham says, as with Bluescope, One Steel is being hit hard by the high dollar and China's ability to make cheap steel it too needs a lower Australian dollar to benefit.

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