Take stock then snap up bargain

Published in the Sunday Mail, December 2012 by Sophie Foster

A gold coin may not buy much these days, but for $1 or less private wealth experts believe there are bargains to be bad in the Australian share market for savvy investors.

But, they warn, investors must have their "eyes wide open" to avoid buying a lemon.

Of the 500 stocks comprising the All Ordinaries index, roughly 180 are currently trading under $1.

Hundreds of other sub-dollar stocks trade on the Australian Securities Exchange but often fly under the radar, being too small to attract the attention of most traders.

RBS Morgans senior private client adviser Simon Ferguson said stocks sitting under the dollar mark were there for a variety of reasons, including normal business cycles, economic conditions, structural changes and because investors were still risk-aversive.

"I would say go in there with your eyes open and be aware," he said.

"It’s nice to look at the potential upside but ask yourself whether you could stomach the potential losses that may arise in some of these smaller or more volatile stocks.

"Look at the potential downside risk." Macquarie Private Wealth head of research Riccardo Briganti said the first rule of coming out on top was not to confuse the price of a share with the value of the stock or how risky it was.

"A stock trading at $20 per share may he undervalued, while a stock trading at 10~ may be expensive."

This necessitated a broad range of measures including valuation checks such as the price to earnings ratio for current price relative to the company’s earnings and balance sheet scrutiny such as debt to equity or interest cover, he said.

"The risk of a stock is more complicated than focusing solely on the price," Mr Briganti said.

"A stock that is trading at $10 and has historically traded within a very tight price range could be said to be low risk.

"Alternatively, a stock trading at $10 could be described as high risk if it has traded as high as $60 and as low as $1.

Wealth Within chief analyst Dale Gillham said, while it was an oxymoron to believe that a share price of about a dollar was a bargain, there were a couple of stocks that he liked in the region, including Arrium (previously OneSteel), Fairfax and Billabong.

"OneSteel’s only trading at around $0.75" he said.

"A really good, well-managed company it’s quite cheap at the moment.

"I’ve been talking about Fairfax for the last five or six weeks, especially now that it’s looking like it’s trying to offload Trade Me NZ to cash itself up. 

If you ask me to put a stock on my list of dark horses for 2013 it would he Fairfax." Billahong was another stock Mr Gilham liked.

"It’s just under a dollar at the moment.

"We’ve had three takeover bids this year eventually somebody’s going to grab it.

"There’s really only upside to that stock because it’s definitely not going to go broke and as the economy picks up that will normally generate better returns anyway.

I think that’s another little dark horse." RBS Morgans’ Mr Ferguson also liked Fairfax.

"I think it is higher risk hut I think if you are patient there’s value if you add up the sum of the parts," he said.

He said Queensland-based oil and gas firm Senex was also interesting, having fallen back to the $0.6O mark a few weeks ago from more than $1 earlier in the year. It closed at $0.80 on Friday.

"We’re comfortable with their suite of assets; they’re well capitalised so they’ve got a lot of cash, production’s increasing.

"There’s a lot of potential in oil and gas in the Cooper Basin, which we think would be a catalyst for the share price next year, but it is higher risk.

Wilson Asset Management chairman Geoff Wilson said, when venturing into the $1 or less market, the valuation of a company was most important (share price multiplied by number of shares on issue).

"When we invest we look for undervalued growth companies," he said.

His picks included IT professional services company RXP Services is "in an early growth phase with strong management pedigree and potential for further growth via acquisition" and insurance finance firm Centrepoint Alliance is "very cheap based upon a large franking credit balance".

Hills Holdings (HIL) caught his eye trading well below net tangible assets, while IT services firm Empired’s (EPD) new contract wins and acquisitions driving growth seemed attractive.

He also liked listed fund manager Clime investment management (CIW) which "looks significantly undervalued on a percentage of funds basis" while Sir Ron Brierley’s Mercantile Investment Company (MVT) returned more than 50 per cent last year.

As with most things, private wealth advisers don’t like to put all their eggs in one basket, with Wealth Within’s Mr Gillham recommending only up to 10 per cent of a portfolio be in the $1 or less trading price market.

"If they go south, you’re only losing 10 per cent of your total capital you’ve got available," he said.

"You really need to be putting your money into the big stocks - the BHPs, Rios, Woolworths, Seek, Telstra, CSL; that’s where most of the money should be if you’re holding for the long term.

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