Rudi On Thursday

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

As per usual, the negative news has come out much quicker than expected in the new year, even though the negative news itself should not have been unexpected. Global share indices have recorded technical corrections from their early November peaks this week and no doubt many an investor is now worried this might set the tone for the rest of the year.

While enjoying a short break over the end of year holiday season, I took the effort of buying and reading as many expert stock tips, lists, outlooks and advises for the new year as possible. It’s a pity the negative developments have occurred this rapidly as some of the conclusions that were drawn from this exercise would have been proven quite prophetic.

Let’s start with the fact that nobody really knows how 2008 will turn out -there are too many dangers and uncertainties- but everybody is fearing the worst: a flat year for equities (or even negative). After several years of double digit returns and extremely profitable mini-booms inside the bigger bull market such as uranium, iron ore, oil and coal, all of a sudden there’s a reasonable chance that 2008 will have none of that.

The reason for this is as clear cut as has ever been over the past four years: the US economy seems poised to fall into recession in the first half of this year and while the expert community has been philosophing a lot about the rest of the world holding up their own pants, we still have to see whether theory and practice can match each other on this matter.

The good news is that any recession is widely believed to be short lived and that the second half of this year might provide investors with a completely different scenario (a more positive one). But then again, it might not – and we still have to live through the first half.

Conclusion number two is therefore that any projections further out than six months are pretty much worthless. Anyone who puts an estimate forward for the end of the year and would proven to be correct has flirted heavily with Dame Fortuna (and knows it). Six months is pretty much the maximum horizon within the current framework, and that is also the general perception one has after reading all those projections for the new year.

If you think it seems thus a bit silly to make projections for the full year, I can only agree – and assume that most experts agreed to do it because it is the usual, fits-all-seasons, worn out formula.

2008 won’t be a year to pick sectors, or to simply try tracking the major index. Current uncertainties will transform into dangers and sad realities and ultimately this will deflate many too high and too optimistic expectations – both by securities analysts and company executives. What this means is that risks are firmly skewed to the downside. Disappointments are poised to follow and the upcoming results season is likely to bring lots of it. History shows there are many genuises around when good times are on a roll, but only a few when the tide turns. This principle will come to the surface once again this year. Careful stockpicking will thus be key as differences between business models, management styles, talent, market positions, balance sheets, access to funding and corporate safety nets will be revealed.

It is probably a good idea to repeat what Citi strategists said in December: this is not a time for trying to be the hero. Remember Centro Properties ((CNP)), how quickly it went and how little shareholders actually could do to stop the value erosion. 2007 has plenty of such examples, 2008 is likely to add more. If you are currently in this market with a longer term share portfolio it’s probably better to focus on minimising any potential heavy losses first. As any experienced investor can tell you, those losses can bring you much more grief than any joy from some well picked winners can ever compensate.

Given the heavy risks involved, and the rather subdued potential gains, I returned from my short holiday with the conclusion that even if you’d be focused on making money from the share market this year, there was absolutely no reason why you should be fully invested at the start of the new year. Cash is king and I have already picked up left, right and centre that that’s exactly what many an expert has been putting into practice since the closing quarter of 2007.

Volatility creates opportunities, but only for those who have the money ready to jump in and be able to monetise on it.

I do realise I am writing these sentences after this week’s developments (and not before) so I can only hope at this stage that most of you had already drawn the same conclusion before reading this week’s editorial. As the share market has now fallen in excess of 11% from its November peak, stockbrokers are poised to start pointing at “value opportunities”.

Among the most logical candidates will be the major banks. FNArena’s Stock Analysis feature on the website shows Australian banking stocks are now trading at forward multiples not seen in many, many years. CommBank ((CBA)) is the exception but this is a reflection the bank is actually the number one or two pick at most brokerages in the sector. Even if earnings estimates will come down for the banks, as some critics are suggesting, one would still be inclined to think current low valuations will be proven too low over time. Another argument that will be brought forward is that after this month’s sell-off most banking stocks are now offering projected dividend yields between 5.5 and 5.9%. Given all the above arguments and uncertainties, relatively safe dividend returns will be highly sought after.

If you are looking to add to your banking exposure, be aware that CommBank and Westpac ((WBC)) are currently clearly preferred above the rest of the pack (and this is also reflected in their higher PE ratios).

And the banks are playing catch up by raising their mortgage home loan rates (CommBank followed National ((NAB)) and ANZ Bank ((ANZ)) today) and this should strengthen overall market comfort with projected earnings growth.

Another stand out feature of all these expert projections for 2008 is that some of last year’s best performers including BHP Billiton ((BHP)), Rio Tinto ((RIO)), Woodside Petroleum ((WPL)), Harvey Norman ((HVN)) and Woolworths ((WOW)) have simply returned into many of this year’s top pick lists.

However, most experts also felt the need to go niche and obscure -no doubt in an effort to beat the competition. I saw some companies mentioned on those lists I have never heard of (and that says a lot for someone who spends as much time on finance and Australian companies as I do).

So apart from the usual suspects (read: resources companies and Australian banks), where do these experts think you should be putting your money this year? I noticed technology stocks were mentioned quite a few times. Think Reckon ((RKN)), Data #3 ((DTL)), Oakton ((OKN)) and even Arasor International ((ARR)). The latter stock has had an absolute terrible period in the second half of last year, so maybe that should guarantee a better performance in 2008?

One might conveniently add some specific internet stocks to this sector as well, such as Wotif.com ((WTF)) but also ad agency Mitchell ((MCU)) and Melbourne IT ((MLB)) as well as various smaller telco companies such as Service Stream ((SSM)) and M2 Telecom ((MTU)). Telstra ((TLS)) has a few mentionings as well.

Some experts would add uranium stocks such as Energy Resources of Australia ((ERA)) and Paladin ((PDN)) or agricultural stocks such as ABB Grain ((ABB)), Graincorp ((GNC)) and the DWS Global Agriculture Fund. Salmon farmer Tassal Group ((TGR)) could be regarded as part of this group as well. Some experts would add the occasional biotech or medical services company such as Avastra ((AVS)) or Pharmaxis ((PXS)).

But most of all, most experts seek the potential for excess returns among smaller mining and mining services companies. A few names that caught my personal attention are Adamus Resources ((ADU)), Albidon ((ALB)) and Breakaway Resources ((BRW)). Industrea ((IDL)), Swick Mining Services ((SWK)), Mincor ((MCR)) and Equinox ((EQN)) have been receiving quite some attention as well.

I wish to make a special note that I left out the January edition of Fairfax’s SmartInvestor. I was foolish enough to purchase the edition this week in my quest to include all major publications in Australia, but was heavily disappointed when I found out the information for the main story had been collated sometime around September-October last year. With all respect for the journalists who put in the effort, but that’s simply too long ago to retain any relevance in this fast moving global environment. I also noticed most experts cited in the magazine have an index target of 7000 for the end of 2008. Again, this information appears to be superseded by an update in the Australian Financial Review this week which revealed  most experts have lowered their target, suggesting 7000 may even never come within reach this year.

And last but not least, journalists at Crikey.com have taken the effort of tracking the “20 Stocks to Watch in 2008” published in the Australian Financial Review last weekend. They found that nearly all of the stocks on the list ended the first day of the week on a positive note when most ASX-listed stocks felt the weight of selling orders pushing share prices down. Maybe something to keep in mind for next year?

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always supported by the Ab Fab team of Chris, Greg, Grahame, George, Joyce, Sophia and Paula).

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