18 Share Tips - 6 June 2011

#FOTO:1062:200#

Michael Heffernan, Austock

BUY RECOMMENDATIONS

Service Stream (SSM)

A contractor to the telecommunications and utility sectors, which now has its fortunes very much tied to the deployment of the National Broadband Network. The recent agreement with Fujitsu to install fibre to new housing estates is a positive catalyst for the company in the near term.

Stock code: SSM

Charts: Service Stream Limited

More news: Service Stream Limited

Slater & Gordon (SGH)

Australia’s only listed legal firm continues to progress in a quietly robust manner. Slater & Gordon represent a superior investment option among small industrial stocks in the current environment. Litigation is likely to be unaffected by a slowing economy.

Stock code: SGH

Charts: Slater & Gordon Limited

More news: Slater & Gordon Limited

HOLD RECOMMENDATIONS

Commonwealth Bank (CBA)

The strong trading update stands in contrast to the weakening of CBA’s share price. While the sluggish Australian economy and Moody’s rating downgrade for Australia’s four major banks are negative generally, CBA’s stronger business lending growth and its increase in the proportion of consumer deposits to total assets, stand it good stead for the future. Its fully frank dividend yield of 5.5 per cent is most attractive.

Qantas (QAN)

Airlines have hit substantial turbulence recently with high oil prices, and the strong Australian dollar deterring foreign visitors. On top of reported possible industrial dispute at Qantas, the sharp retreat in its share price looks overdone.

SELL RECOMMENDATIONS

BlueScope Steel (BSL)

Australia’s major steel stocks are continuing to face heavy weather through heightened import competition, a difficult export market due to a stronger Australian dollar and problems associated with the prospect of a carbon tax. While the share price has significantly fallen, any sustained recovery still looks some time off.

Fairfax Media (FXJ)

This mostly traditional media stock faces difficulties with a soft economy restricting growth in advertising revenue. The effect of its strategic review is yet to be reflected in its bottom line, so investors should be in no hurry.

#FOTO:1064:200#

Peter Rae, Morningstar

BUY RECOMMENDATIONS

Macquarie Group (MQG)

Macquarie is Australia’s most successful investment bank. Strength lies in the diversity of its income stream, with international expansion adding another dimension to earnings capacity. Earnings suffered in the aftermath of the global financial crisis, but there’s considerable upside when favourable investment banking conditions return. Management is sharp, astute and ever ready to take full advantage of market situations.

Stock code: MQG

Charts: Macquarie Group Limited

More news: Macquarie Group Limited

SMS Management & Technology (SMX)

SMX is an IT services company that provides consulting services to a diversified portfolio of government and private sector clients. IT outsourcing is a growth industry, and SMX has experienced strong revenue and earnings growth in recent years. We expect this to continue. The balance sheet is strong with no debt. SMX is a well-run business with attractive exposure to a growth industry.

Stock code: SMX

Charts: SMS Management & Technology Limited

More news: SMS Management & Technology Limited

HOLD RECOMMENDATIONS

NRW Holdings (NWH)

Provides contract civil and mining services, and is particularly leveraged to WA’s iron ore market, but is also expanding into Queensland coal. Recent contract wins have increased the order book to record highs and this should lead to strong earnings and revenue growth. But earnings are highly leveraged to the resources cycle and a downturn in this sector would adversely impact profitability.

Incitec Pivot (IPL)

Produces and distributes fertilisers and explosives. It’s exposed to key agribusiness and resource inputs, which are currently benefiting from favourable conditions. However, fertiliser and explosives prices are highly volatile and depend on soft and hard commodity end prices and cycles. Cost efficiencies are contributing to earnings growth, and capacity expansion will boost earnings from mid-2012.

SELL RECOMMENDATIONS

Elders (ELD)

An iconic Australian name with a strong rural services franchise. But it’s struggled to perform in recent years given difficult rural conditions, a tough automotive market and the collapse of the forestry managed investment schemes industry. We see no prospects of any significant short-term recovery in the company’s fortunes.

Amcor (AMC)

Manages an extensive global network of packaging plants across various product segments. With limited industry pricing power, there’s little competitive advantage despite scale and product innovation, which requires upfront investment. While the company should benefit from a global economic upturn, it’s vulnerable to raw material cost increases. There are better opportunities elsewhere.

#FOTO:1063:200#

Brett Schreuders, Alto Capital

BUY RECOMMENDATIONS

Hawkley Oil & Gas (HOG)

Following a recent placement, this cashed up oil and gas producer is trading at less than 3 times revenues. With a second appraisal and production well spudded in May, and two more due (into known reserves) within the next 12 months, the stock appears seriously undervalued. Buy for the medium term.

Stock code: HOG

Charts: Hawkley Oil & Gas Limited

More news: Hawkley Oil & Gas Limited

Independence Group NL (IGO)

Having recently completed the acquisition of Jabiru Metals, IGO has broadened its income stream from nickel, to include zinc and copper. With a 30 per cent interest in the world class Tropicana gold project, IGO appears to be oversold and represents good value for long-term buyers around this level.

Stock code: IGO

Charts: Independence Group Limited

More news: Independence Group Limited

HOLD RECOMMENDATIONS

Boart Longyear (BLY)

Boart has recovered strongly from the GFC and recently confirmed its full-year guidance. The drilling and mining services sector remains very well supported globally. The CEO’s recent shareholder address points to strong demand for BLY’s drilling services and products. Further earnings upside wouldn’t surprise.

Newcrest Mining (NCM)

With global uncertainties persisting, the outlook for gold remains robust. NCM remains Australia’s premier gold stock, with low cost production, good exploration upside and strong growth potential. The merger with Lihir Gold last year increases exposure to West Africa and Papua New Guinea, but with half its assets in Australia, the sovereign risk for NCM remains reasonably low for investors wanting exposure to gold.

SELL RECOMMENDATIONS

Westpac Bank (WBC)

Weakness in consumer discretionary, building materials, steel, transport and media stocks should be a major warning sign for mortgage providers of potential trouble heading their way. Westpac has the greatest exposure to Australia’s residential mortgage market and for this reason it’s our least preferred of the big four banks. We suggest a rotation to something more defensive.

Harvey Norman (HVN)

While the share price has retreated considerably from a 12-month high last September, the future looks difficult for discretionary stocks. With cost-of-living pressures on just about everything, including utilities, food and the family mortgage, we recommend cutting losses and being more defensive in the current market.

18 Share Tips – 6 June 2011

18 Share Tips – 6 June 2011

“Are We Entering the Golden Age of Gas?”

Gold Selloff Risk is High