Sprucing up the list

Published in the Herald Sun, October 2014 by Paul Gilder

Another hectic AFL trade period is over and the league’s finest have clarity over their playing futures, with some heading to new homes.

But for shareholders assessing their portfolios the “trade period” never really ends. And analysts say the latest bout of market volatility provides investors with a great opportunity to revisit their portfolios.

So which companies should be traded in, which need a stint on the bench, and which should be shipped off without delay?

“Every year you get a pullback in the markets, anything from 8 to 15 per cent in value. That’s a good time to get rid of the deadwood in your portfolio,” Wealth Within chief analyst Dale Gillham says.

However, the old adage of time in the market, not timing the market, is of utmost importance, others say.

“You can certainly look at investing if you’re a buy-and-hold and shove it in the sock drawer type ... there’s stocks that are looking considerably cheap,” IG Markets analyst Evan Lucas says.

“But this trade period, if you like, is still well under way. We haven’t seen the endpoint yet.”

Big Banks

Michael Heffernan: “I’d be building up on the banks. They’re still producing dividends in excess of 5.5 per cent, and I think they’re of value having come down a bit in price. If you pick up ANZ, NAB and Westpac now and hold them for 15 months, you’ll get three dividends. Our economy’s not falling off a cliff and our banks aren’t looking for the exits.”

Evan Lucas: “Having won the premiership over the past three years, the big four are starting to look a little long in the tooth. Even with the current slide in performance, the banks still look a little top heavy due to the structure of their path to earnings. I would never write off a winning formation but can’t trade them in at the current price either.”

Roger Montgomery: “For the banks, it’s all about potential regulatory changes. (Financial System Inquiry chairman David) Murray may change the mortgage risk weighting ratio so it’s not as
disadvantageous for smaller banks to compete. Any macroprudential measures would provide a detriment in proportion to the bank’s reliance on mortgage lending, and the biggest affected on a relative basis would be CBA.”

Dale Gillham: “We’re going lighter on them at the moment. We’ve actually been getting out of the banks for a while. They’re still not great value at current prices.

Big Miners

MH: “I’m not keen on BHP and Rio. They’re facing a lot of headwinds and are being impacted by declining commodity prices. They’re in the process of tidying up their operations and reducing capital costs. Their revenue growth won’t be shooting the lights out, so I think there’s better things around. As for the mining services companies, I’d be putting them on the interchange bench.”

EL: “The big miners have taken a hit in the underlying commodities market but I am never one to write off this space and they will return to form. Like the star player of the AFL, there’s one you want more than the others and at present that’s BHP. Its earnings stream is a much better mix than the pure play Fortescue and the 80 per cent pureplay in Rio.”

RM: “They don’t deserve a place in a conservative investment portfolio at all, and we include BHP, Rio, Fortescue and Woodside Petroleum in that. Over a long period of time, we feel they
haven’t increased value to shareholders. Woodside has generated $24 billion in cashflow from operations over the past decade, but invested and spent the same amount. It’s paid $6 billion in dividends but had to raise $4 billion in equity and an additional $3 billion through other measures in that time. It’s perhaps unsurprising their share price today is where it was in 2006.”

DG: “This is an area we’re really excited about. With the Aussie dollar down, people have been waiting for an opportunity to get into the miners and BHP, Rio and Fortescue represent an area of growth for the next one to three years. Yes, China’s cooled off in demand terms, but it’s not done yet. Countries always go through these seasonal-style waves of demand. It’s ‘winter’, if you like, in China at the moment.”

Defensive Stocks

MH: “One of the best is Transurban. It’s the premier toll road operator in this country and has made some very opportunistic acquisitions in Sydney at a good price. Its growth prospects in
Queensland are very good indeed. I’m not quite sure healthcare stocks are that defensive these days. In any case, Ramsay Health Care is a great stock anyway.”

RM: “What does it mean? The only defensive business is a very good one, one that generates high returns on equity, has little debt and high growth prospects.”

DG: “What we call a defensive is not necessarily what a big institutional investor might call it. We still like Telstra in this respect plus the healthcare sector: they’re in a consistent phase.”

$US Cash Cows

MH: “I’d be advocating people become more involved in them. CSL is my top one, it’s predicting NPAT (net profit after tax) growth of 12 per cent this financial year and I think it can handle the competition in the US. Aristocrat Leisure is a very good operator in the gaming area, it’s just taken control of Video Gaming Technologies so that deepens its exposure in America. Cochlear is starting to come good as well.”

RM: “There’s fantastic opportunities here. (Cancer drug developer) Sirtex derives 70 per cent of its earnings offshore, CSL is another one. One to keep an eye out for in the wake of the Ebola scare is Flight Centre, which stands to substantially grow its revenue base offshore.”

DG: “There has been a slide in the Australian dollar against the US and pretty heavy support at home for pushing it down. It’s just going through a bit of a readjustment, but that said we still like CSL and Cochlear.”

Energy Players

MH: “Wesfarmers and Woolworths fit neatly into that defensives mould, and they’re the only staples around the place I’m interested in, by a mile. Metcash: no; CocaCola Amatil: no; Bega Cheese: maybe.”

EL: “The supermarkets remain the benchmark of consistency. (Their) growth, earnings and a growing dividend is why adding these players ... will provide you with a solid workhorse player.”

RM: “They’re under pressure at the moment, with the entrance of Aldi and Costco into the marketplace. Woolworths would be concerned with the growth of (hardware chain) Masters. All
up, if you’re getting a return out of them at the right price they’ll be of value.”

DG: “This is an area that has done quite well, with consumer discretionaries doing even better over the past 12 months. While we don’t expect the likes of Woolies and Wesfarmers to win the
grand final, they’re not volatile stocks and they’ll just trundle along. Even Myer we think will come back.”

Consumer Staples

MH: “Woodside Petroleum is certainly the top pick and it’s about the only one I’d recommend with any enthusiasm. It’s also paying a pretty good dividend and has some promising LNG
contracts with a number of Asian countries. Oilsearch’s Papua New Guinean oil and gas project is starting to work well but it carries a bit more exploration risk.”

EL: “Energy is on the cards to be the premiers over the coming half-decade. These companies’ organic growth profile coupled with dividend growth is why they are ripe for the picking. They’re a very good trade considering they have been sold off due to the world oil price.”

DG: “Santos is one we’re keen on and I do like the sector, especially with that gas growth story coming in Australia. Oilsearch is well managed, it’s just a bit unloved at the moment.”