FYI | Jul 04 2007
Life has treated the FNArena Sentiment Indicator very harshly in the first half of this year. When we were asked to provide ten stocks for the new year in December 2006 we turned to our own Indicator and came up with the following list:
BHP Billiton (BHP)
Boom Logistics (BOL)
Domino’s Pizza (DMP)
Emeco (EHL)
Macquarie Bank (MBL)
News Corp (NWS)
Oil Search (OSH)
Rio Tinto (RIO)
ResMed (RMD)
Spark Infrastructure (SKI)
Conclusion number one is that our Indicator picked some of the best performers on the local stock market since then with BHP Billiton, Rio Tinto, Oil Search and even Macquarie Bank and Domino’s Pizza so far generating higher returns than the S&P/ASX200 index.
Conclusion number two, however, is that the above list also contains some of the very, very poor performers over the past months: Boom Logistics, Emeco, News Corp and –above all- ResMed have lost quite some value since December.
As a result, the ten stocks combined have only managed to generate an average return of some 7.7% compared with the 12.97% of the index.
Will the second half of the year see a reversal?
Judging by the ongoing positive broker sentiment towards the big losers on the list the answer has to be a firm “yes”. I do have an eerie feeling though that it may require more than a simple value proposition before investors start jumping on the likes of Boom and ResMed in the months ahead. If they do, however, the jump could be big.
Whatever the case we’re only half way through the year and our broker sentiment driven annual stock lists have managed to beat the Australian market by circa 5% over each of the three previous years (For more info see “The Eccentric Uncle We All Wish We Had”, 12/12/2006, in Weekly Insights on our website).
Maybe conclusion number three is that whatever system one comes up with, or Indicator, it’s always best to include the human factor. So here are a few of the stocks selected by human experts at some of the major equity research institutions in the local share market.
At GSJB Were the strategists had something to celebrate recently as their so-called Conviction List had clearly beaten the Australian market in its inaugural year. The broker reported this week –proudly- the list had managed to outperform the Australian share market in eleven out of the past twelve months, which is a big endorsement.
Currently the Conviction List contains the following stocks: Australian Worldwide Exploration (AWE), BHP Billiton, Boart Longyear (BLY), Flexigroup (FXL), Kagara Zinc (KZL), Lihir Gold (LGL), Macquarie Airports (MAP), National Australia Bank (NAB), Pan Australian Resources (PNA), QBE Insurance (QBE), Rio Tinto, Westpac (WBC), Westfield (WDC) and Woolworths (WOW). All these stocks are considered Buys with a strong conviction. GSJBW has only one stock on the Sell side with an equally strong conviction: Paladin Resources (PDN).
The problem with including the human factor though is that many humans have different views and opinions.
At Deutsche Bank, for instance, the strategist would agree with GSJBW’s heavy focus on resources, but not so when it comes to the banks. Deutsche remains a fervent advocate of keeping a Resources Overweight position in one’s investment portfolio and has selected BHP Biliton, Rio Tinto and Woodside Petroleum (WPL) as the preferred Buys.
Stay Underweight building materials, the broker says, recommending James Hardie (JHX) should be sought in the sector and Boral (BLD) is best to Sell.
The advice for Transport stocks is to remain Marketweight. Deutsche likes Brambles (BXB), Virgin Blue (VBA) and Toll Holdings (TOL) in the sector, but would Sell Qantas (QAN).
The Gaming sector also receives an Underweight recommendation. Here the broker likes Aristocrat (ALL) but not Tattersall’s (TTS).
Deutsche advises to stay Marketweight for Media stocks, advising the stock to buy is Publishing and Broadcasting (PBL), the one to sell is Ten Network (TEN).
Retailers should be owned above their index weight as well. Deutsche likes Harvey Norman (HVN) and Pacific Brands (PBG) and has no absolute dislike to any other member of the sector.
Deutsche would also go Overweight Healthcare stocks with ResMed (RMD), Sigma (SIP) and Sonic (SHL) the preferred Buys while Banks should be held Underweight. Deutsche does agree with GSJBW’s preference for National Australia Bank. It is the bank to Buy, Deutsche agrees.
General Insurance receives an Overweight recommendation as well. Preferred Buys are QBE Insurance and Insurance Australia Group (IAG). The same applies to Other Financials with the broker suggesting one should buy Macquarie Bank and Challenger (CGF) but sell AMP (AMP).
Rising bond yields are bad for property trusts so go Underweight, advises Deutsche. Preferred exposures are Lend Lease (LLC) and Westfield. Investors are advised to dispose of Centro (CNP) and Macquarie Goodman (MGQ).
Infrastructure, however, still deserves to be Marketweight, the broker believes: Buy Transurban (TCL) and Macquarie Airports with no preferred Sells. But Utilities should be held Underweight: Buy Alinta Energy (AGK).
Telecoms should be held in Overweight as well, Deutsche believes. The broker would still Buy Telstra (TLS).
At Merrill Lynch, however, the strategists have been flagging they will gradually reduce their Overweight position in Resources. The broker has recently been taking some profits on BHP Billiton along with Leighton (LEI) and CSL (CSL) and bought some more shares in Rio Tinto and Newcrest Mining (NCM).
Merrill Lynch’s in-house cyclical indicators are pointing to global inventory liquidation being complete by mid 2007 and the strategists anticipate that risk appetite will settle at a structurally lower level. The up cycle is seen maturing in the second half of 2007 and this process is expected to go hand in hand with rate expectations building.
The broker is still Overweight banks but has recently replaced National Australia Bank with CommBank (CBA). In addition, some pure play metals stocks have been sold in order to buy more of ANZ Bank (ANZ) and Westpac (WBC). The Underweight position in Property Trusts has been reduced.
Merrill Lynch seems to like Coates Hire (COA) and Downer EDI (DOW) as well.
According to quant analysts at Citi the ten stocks with the highest projected returns in the year ahead are: Hutchison Telecom (HTA) with 100% potential, Safe Effect Technologies (SAF) with 60%, Emeco with 55%, Commander Communications (CDR) with 48%, Transfield Services (TSE) with 43%, Felix Resources (FLX) with 43%, Asciano Group (AIO) with 42%, Macquarie Bank with 42%, Redflex Holding (RDF) also with 42% and Sally Malay Mining (SMY) with a potential upside of 38%.
For our Top Ten of most highly recommended stocks for the year ahead, again selected by our own Sentiment Indicator, I refer to this week’s Weekly Insights. For more detailed information see the July edition of The Australian Super Stock Report.
Till next week!
Your I hope you will all have a good year ahead editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Three: Greg, Chris and Terry)