FYI | Sep 05 2007
Do any of you have a similar feeling that financial journalists and market commentators often read too much in the movements of share prices?
Experts at ABN Amro were no doubt inspired by a similar gut feeling when they conducted an in-depth study about the predictability of future economic growth on the basis of share price movements today.
Their conclusion is there is no relationship. So next time anyone tries to tell you the world is going under, because share prices are going down, or everything should be just fine, because share prices are up, simply ignore them.
It’s probably of more interest to know that, as ABN Amro concluded, share markets tend to overestimate the economic growth that lies ahead. A cynic would add and that’s why we have corrections, on occasion.
Putting this in the current context means we can only conclude that investors are currently hoping for the best, as the problem with credit and debt products is still raging inside the global financial industry, but we don’t see much of it in our daily lives, and we don’t seem to read and hear much about it these days either.
No doubt, most among us sense there will be more, probably lots more, to come to the surface in the weeks and months ahead, but until then, life has to move on.
I received a report today that specifically focuses on moving on in the share market. I promised I would not mention the author, or his employer, so I won’t, but I’ve decided I would share the content of this report with you all today.
So which stock should one buy in the jittery market of September 2007?
According to the report it is best investors focus on EPS growth, not just the one time flyer that happens to have one great year ahead, but better to look for a longer trend. So what investors should consider is how EPS growth turned out in the years past and how this trend looks like in the years ahead.
In addition, always look for the share price valuation. You don’t want to overpay for future growth as you never know what can happen and high PE (price/earnings) ratios can turn ugly when a correction occurs.
So what we are looking for, in essence, is companies that have proven they can grow their earnings per share at reasonably high multiples while the expectation seems justified they can repeat this in the years ahead, with a share price that is currently valued at rather modest multiples.
Hmm, I can already see where this is heading to. And sure it is, when it comes to listing names that fall into this category, we find a few companies for which I am certain we can all come up with a reason why their share price is at a modest valuation at this point in time: Macquarie Bank (MBL), Allco Finance Group (AFG), FKP Property (FKP) and Billabong (BBG). And all the major banks, of course.
However, instead of dismissing all these names, it may be worth to have another think about this as I suspect that what the author is trying to tell us relates to the old adage of “better to buy a straw hat in winter”. All the above mentioned names are out of fashion at the moment, but if current headwinds won’t have a significant affect on their ability to grow profits in the years ahead, their share price valuation is poised to recover at some time in the future.
This is probably why stocks such as Macquarie Bank, Allco Finance and Billabong are enjoying mostly positive ratings by the ten experts we monitor. Most views on the big banks are neutral, but I am certain nobody will deny they all view the banks as a must have for every long time investment portfolio.
FKP Property proved to be the exception on the list. I could only find one single expert in our database who seemed genuinely positive about the stock, and that’s Macquarie.
Other names that meet the above characteristics include BHP Billiton (BHP), Rio Tinto (RIO), Metcash (MTS), OneSteel (OST), QBE Insurance (QBE), Ramsay Healthcare (RHC), Austal (ASB), Programmed Maintenance Services (PRG), and Tassal Group (TGR).
I could easily mention a few more, such as Mitchell Communications (MCU), Oakton (OKN) and Boart Longyear (BLY), even though the latter has a rather short history as an ASX-listed entity.
I put all these names through our Stock Analysis application on the website and found that most of these stocks enjoy an overall positive sentiment among securities analysts, with the exception of Metcash and Ramsay Healthcare. The latter’s ratings are still predominantly positive but the recent result disappointed and led to two recommendation downgrades. Hence my caution: we may be experiencing a negative trend.
Equally important are the characteristics that are probably best to avoid: a falling EPS growth trend in combination with a rather expensive share price valuation. Names that fit this category include Australian Agriculture (AAC), APA Group (APA), Iluka (ILU), McGuigan Simeon Wines (MGW), Oil Search (OSH), Santos (STO) and most property trusts.
When I put this last category of stocks through our Stock Analysis application on the website I found that, with the exception of Oil Search, expert views for these stocks are highly divided with most of them enjoying Buy, Neutral and Sell ratings.
Oil Search enjoys an overall positive sentiment, but it would seem this is largely based on future exploration success.
Till next week!
Your always happy to share editor,
Rudi Filapek-Vandyck
(supported by the Fabulous team of Joyce, Grahame, Greg, Pat, Terry, Chris and George)
