The US downgrade last month, ongoing European debt problems, a bleak outlook for the UK and poor local data all contributed to a terrible month for Aussie investors in August. The All Ords has now dropped 15.5% since April 11th, with 8.5% of that fall coming since the market shock on July 22nd. Some blue chips have fared even worse, with large falls for megaminers BHP and Rio, down 12.7% and 13.6% respectively.
Even traditionally defensive stocks that should shine in troubled times like Woolworths were sold off, with the retailer dropping 7.47% over the past fortnight. Meanwhile Woodside slipped to $34, making it a potential takeover target for BHP once again.
According to brokers, the market dip makes the following blue chips even more attractive.
|Company||Stock code||Current share price||Share price July 22nd||% Change|
UBS, Credit Suisse, Morningstar, William Shaw, Deutsche
|% change since July 22||-8.8%|
Of all the reasons to consider investing in Woolworths right now, perhaps the most salient is brand identification. The Brand Finance Institute recently announced recognition of Woolworths as Australia’s most valuable brand for 2011. What is especially notable about this achievement is that the Brand Finance Institute includes financial performance in its evaluation. Woolworths has already survived one Great Financial Crisis and there is no reason to believe they could not survive another.
Shawn Uldridge, of William Shaw Securities
Uldridge says Woolworths isn’t the cheapest stock at 14.6 times earnings and an historical 4.35 per cent dividend yield, but at $25 levels it’s trading at the lower end of its range. “The chances that such a consumer staple comes under any serious pressure are remote,” Uldridge says. “We like Woolworths, because the duopoly position it enjoys in supermarkets make it a steady earner, and the barriers to entry are huge.” Also, Woolworths offers multiple earnings streams from liquor shops, hotels, consumer electronics and fuel. Uldridge says Woolworths at current levels is a good entry point for a company offering a lot of upside capital growth potential.
Andrew Inglis, Shadforth Financial Group
Inglis believes that in the event of a continuing downturn in the sharemarket, Woolworths appears reasonably priced with a dividend yield of 5 per cent and the possibility of further share buy backs. “Its mainly defensive business has already proven it can ride out a GFC,” he says.
Roger Leaning, Head of Research, RBS Morgans
Despite the GFC impact, back in May Leaning said the PE contraction was unwarranted. WOW is traditionally considered a core defensive holding of most portfolios based on a solid, reliable and predictable dividend reflecting its staple cash flows. But Leaning said that investors should note that WOW is also offering 6.5 per cent EPS growth this year and in excess of 10 per cent annually over the next two years. He said an inspection of its performance over the past five years highlights a decreasing PE ratio, despite an increasing EBIT margin. With sellers running out of steam, he believes that the downtrend from the October 2010 high is set to reverse. From a technical perspective WOW is Leaning’s top call which he says represents the best value defensive play suitable for all portfolios. “The potential long-term upside price target is $30.00,” says Leaning.
Cleo Nanni, Novus Capital (HOLD)
Nanni has a hold on one of Australia’s most successful and consistent retailers. “Clever marketing campaigns, such as the “Fresh Food People”, has contributed to its success,” he says. “My price target is $30…hold for that level.”
Les Szancer, Alpha Broking (HOLD)
Rival Coles has snared market share. However, I would hold Woolworths stock, particularly if you bought between $25 and $30. It has bounced off a double bottom and we expect it to move back towards a recent high above $27. On September 8, it was trading at $25.41.
2. Rio Tinto
Merrill Lynch (PT $110.00), RBS (PT $96.00), Citi, Perpetual, BT, Goldman Sachs, Alpha Broking, Pengana Capital Managers, Investorfirst (Valuation $97.66), Atom Funds Management
|% change since July 22||-13.6%|
RBS Morgans – Nicholas Brooks, Paul Shepherd, Roger Leaning
Brooks says that the cash generation in the megaminer is so huge that when the reporting season starts in August, Rio should be completely ungeared. “All divisions are expected to report quality results, and with Rio currently trading at a discount to rival BHP, we expect that gap to close in the short term,” he says. Shephard also believes that the global miner is offering rare value, trading at a discount of over 40 per cent to his valuation and target price. “It’s undertaking an aggressive organic expansion plan that should underpin significant production growth,” he says. “We also see opportunities to increase capital management in the medium term, a key positive catalyst.”
Head of research with RBS, Roger Leaning remains overweight resources, but also favours diversified large caps, especially those with robust cash flow and low-cost operations exposed to infrastructure commodities like iron ore, copper and coal. As Australia’s ‘proxy diversified’, Leaning says it is often overlooked that BHP is also the country’s largest listed oil producer – nevertheless, he says Rio Tinto still makes for better exposure at current levels.
Cleo Nanni, Novus Capital
Nanni believes that current price action indicates a strong buying opportunity, particularly below $80. “Hold and consider accumulating while a good opportunity exists,” he says.
Les Szancer, Alpha Broking
Szancer lists Rio Tinto a hold, but not because he has gone bearish on commodities. He says he is actually still mid-to-longer term bullish. “In the short term, however, the markets are having an issue with direction, so I wouldn’t be adding at the moment,” he says, saying: “Rio has been $160 a share and one day it will return to those lofty heights.”
George Sakellariou, Investorfirst Securities
Sakellariou says that consensus estimates for Rio Tinto reveal flat earnings growth beyond 2011, which translates into a discounted forecast price/earnings ratio of just 9 times calendar year 2011 earnings. “Rio is trading at a significant discount to our blended intrinsic valuation of $97.66,” says Sakellariou. “Improving momentum conditions should support a sharp rally…with initial resistance expected in the $86 region.”
Pengana Capital Managers portfolio manager Tim Schroeders
Schroeders expects large cap diversifieds like BHP Billiton (BHP) and Rio Tinto (RIO) to weather a protracted period of market correction better than some pure-plays or explorers moving into development phase. “Investors are likely to remain cynical about junior resource stocks until there’s greater clarity over where markets are heading,” says Schroeders.
3. Woodside Petroleum
Deutsche (PT $52.80), Citi (PT $44.02)
|% change since July 22||-12.7%|
Cleo Nanni, Novus Capital
Nanni points out that Australia’s premier oil and gas company is a proven performer, well managed and offering a strong balance sheet. “It’s suitable for conservative investors seeking oil and gas exposure for potentially standout long-term growth,” he says. He thinks that the recent volatile price provides a great buying opportunity. “We believe Woodside is a stand-out, long term growth opportunity for investors seeking oil and gas exposure,” he says. “Buy and hold.”
Shawn Uldridge, William Shaw Securities
Australia’s largest listed oil and gas company recently reported in line with expectations, booking a first half profit of $US828 million. WPL has declined from an average share price of $45 in the past 12 months to $35.62 on September 1. Over the long term, we hold a positive view on oil and, accordingly, will continue to hold our positions in WPL for the foreseeable future.
George Sakellariou, Investorfirst Securities
Sakellariou is bullish about the crude oil price outlook, predicting a 20 per cent rise within the next year and up to 50 per cent within two years. Regarded by many as a core stock of any portfolio, Woodside operates the North-West-Shelf Project, which produces about 40 per cent of Australia’s oil and gas. It plans to become a global LNG leader by 2015. Sales revenue of $US4.193 billion in 2010 represented a 20 per cent increase on 2009. Company NPAT was up 6.9 per cent to $US1.575 billion. Takeover speculation doesn’t seem to wane, but Sakellariou says this proven performer offers bright long term prospects. “We view Woodside as a low risk buying opportunity, with initial upside potential to $53, and between $65 and $70 within the next two years,” he says.
Richard Batt, Shadforth Financial Group
The oil and gas giant recently reported a first half profit after tax of $US828 million, down 8.1 per cent, but marginally better than expected. Revenue was strong at $US2.253 billion, up 7.2 per cent on last year’s first half. And the first half dividend rose US5 cents to US55 cents a share. Importantly, the Pluto LNG project is on target to start producing in 2012. The stock offers value for a company with solid growth prospects.
4. BHP Billiton
UBS (PT $52.00), Citi, Shadforths, Patersons, Perpetual, Armytage, Morningstar (PT $53.50), Atom Funds Management
|% change since July 22||-14.5%|
As is to be expected, plenty of brokers have buys on BHP, in fact it’s hard to find a bad word about the company beyond the word “hold”.
James Georges, Patersons Securities
The mining giant will continue to reward investors. Demand for its diverse suite of products from emerging economies should drive profit growth. The company reported yet another record full year net profit after tax of $US23.65 billion, an increase of more than 80 per cent. It also increased its dividend to US55 cents. An increase in the group’s underlying EBIT (earnings before interest and tax) margin to 47 per cent emphasises the quality of the company’s diversified portfolio.
Cleo Nanni, Novus Capital
Nanni maintains a hold recommendation on BHP, however he concedes that it offers a global portfolio of quality and diversified assets and should be picked up at current levels. “Recent price action has us buying on dips…the company provides great value at these levels. Don’t sell; this will always be a long-term hold.”
George Raftopulos, Atom Funds Management
Raftopoulos says the current environment favours diversified large caps like BHP and Rio Tinto. “Given that the long-term fundamental view remains bullish, the safest way to play resources is having an eclectic mix of large low-cost operators with good resources and strong infrastructure,” says Raftopulos.
Nicholas Brooks, RBS (HOLD)
The world’s biggest miner delivered another record full year profit of $US23.6 billion – the biggest in Australian corporate history. It reported record production across four commodities and 10 operations. It expects strong demand for its core commodities to continue. The company generates incredible cash flows as shown by net operating cash flow of more than $US30 billion. Hold through volatility.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.
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