Arming yourself with relevant company and share sector information significantly increases your chances of investing in winning stocks. The harder you work, the luckier you will be. There are no guarantees of success when buying shares, but those who do their homework will fare much better over the longer term than those who don’t, particularly in today’s volatile markets. There are a myriad of paths to picking a winning stock, from analysing financial statements to examining management performance and keeping on top of the news flow. Sifting out the hot sectors and concluding whether a company’s products and services are in demand will also help, keeping in mind the performance of global economies.
A recent company announcement to the ASX highlights the benefits of keeping abreast of the news flow, according to Alto Capital analyst Carey Smith. An announcement on June 17, 2008, concerned the appointments of Paul Jury as managing director of Comdek Limited and Steve Matthews as executive director and company secretary. Smith says investors applauded Jury’s appointment on his successful record at Resource Pacific Holdings, where, as founder and managing director, he drove a company with a market capitalisation of $54 million in 2004 to more than $1 billion when taken over by Swiss mining giant Xstrata in early 2008. Comdek, an emerging coal producer trading at 20c a share on June 17, has almost doubled in a fortnight. Smith says Jury’s coal background makes him an ideal fit for Comdek.
“The announcement of Jury’s appointment was freely available to investors as it was on the ASX website,” Smith says. “That’s why it’s important for investors to keep track of company announcements involving their own stocks and others they may be considering as an investment. Your broker should also keep you up to date as part of paying commission. But it’s more than a good idea to find out who are the top performing executives in a sector. Top performers build reputation and they take it with them to their next appointment.”
Smith says investors can gain an insight when company giants buy a stake in minnows and mid-sized market cap companies. If a BHP Billiton, Rio Tinto or Xstrata appear on a company register, then that definitely should raise eyebrows and beg several questions as to why they bought share parcels. “If BHP or Rio buys new ground in an exploration company then that may turbo-charge the junior’s share price just on takeover rumours,” Smith says. “It may not come to anything, but do the research and find out.”
It’s also important to invest in companies in the right sector. Listed property trusts and financial stocks have been hammered in response to the credit crunch and the distinct possibility of further interest rate rises. Companies are finding it far more difficult to obtain new funding and others are being forced to sell assets to meet high debt obligations. Companies with high debt levels, such as Babcock & Brown and ABC Learning Centres, have been punished by the market. There appears to be little blue sky for financial stocks until the credit crunch eases and a clearer picture emerges regarding the state of the US economy.
What is evident is that Australia’s resources boom is continuing amid strong global demand for commodities. It pays to keep an eye on commodity prices because some go up and others go down, and movements can have a direct correlation with a company’s underlying share price depending on hedging. Apart from a surging oil price, iron ore and coal prices have sky-rocketed during the past 12 months, while nickel and zinc prices are about 50 per cent off last year’s highs. A higher gold price has rewarded investors in several gold stocks as bullion has risen from the mid $US300 levels an ounce in the past few years to consistently above $US900 today.
Investors were recently given a hint when coal seam gas assets were revalued almost over night when Origin Energy (at the time in takeover talks) claimed its assets were worth considerably more after Santos and Malaysian company Petronas agreed to build an LNG plant using LNG gas as feed. Share prices in other coal seam gas companies, such as Queensland Gas Company, soared on the news – attracting close scrutiny, not only as producers, but as potential takeover targets. Uranium stocks enjoyed a bumper ride several years ago on the back of higher prices and politicians debating the pros and cons of nuclear energy as a cleaner alternative to dirty coal. Uranium is laced in politics and investors can make or lose money at the push of a politician’s pen.
Strong global demand for energy paints a reasonably bright outlook for associated producers. Several analysts are fond of saying that rather than buying companies that rely on oil, such as airlines and transport, investors may find better value in oil producers and explorers.
Morningstar analyst Andrew Doherty says Woodside Petroleum should be part of any energy portfolio as it generates big earnings from a diversified suite of assets across the globe. But for those wanting to increase their risk/reward profile, Doherty suggests buying eight-to-10 energy stocks as it increases the chances of success by spreading risk. Choosing one energy stock is fraught with danger as disappointing exploration, or a profit downgrade will strip the share price, particularly in this market. Explorers, without a history of earnings, carry much greater risk because unsuccessful results will burn money and the company’s share price, while an uncertain capital raising may be the only option during this credit crunch. Doherty says producers, with a good track record of exploration success, is the safer bet as they generate earnings. “If we could consistently pick one stock that was going to soar, then we would all be living in the Bahamas,” Doherty says. “But out of eight-to-ten stocks, if we can get two-to-three to do really well and another three-to-four to justify their investment, then we can cover the losers. This is a far better strategy for building wealth than putting all your eggs in one basket. My advice to conservative investors is to keep speculative stocks to 10 per cent of their portfolio.”
Investors should find out as much as possible before investing in any company. Basic questions for miners include how much resource is identified or potentially available? Is the resource difficult to extract, and what are the costs of extracting it? Is the necessary infrastructure available to ship it to the coast, or does it have to be built? And does the company make money, and how much money is the company projected to make in the future?
Smith, of Alto Capital, says those investing in small industrial stocks should be looking for a return on equity of at least 15 per cent. Investors can get 8 per cent on their money in a bank with much less risk. “Sharemarket investors are going backwards if their return on equity is a paltry 10 per cent,” Smith says.
Michael Heffernan, of Austock, says small to mid-sized industrial stocks offering a high returns on equity, relatively low price/earnings ratios, low debt, plenty of liquidity, a good track record of earnings and bright outlook statements are worthy of consideration. Heffernan says today’s market is not interested in high debt company models and is wary of growth stocks with high price/earnings ratios on fears they won’t meet earnings forecasts.
“There’s nothing wrong with risk if you’re prepared to lose,” Heffernan says. “But I like gains and small companies with a good product and growth strategy in the right sector can handsomely reward investors. Just think of JB Hi-fi and The Reject Shop. JB Hi-Fi issued shares in its IPO for $1.55 in October 2003 and they reached a high of $17 in December last year. JB is trading above $10.50 today (June 30). The Reject Shop issued shares in its IPO for $2 in June 2004. It’s trading at about $9.50 (June 30), but the shares have been as high as $14.81. Both companies sell what people want, and investors have been more than adequately rewarded. Consider what a company makes, sells and offers, then question whether the demand is there. Strong company fundamentals and demand equals a buy.”