Portfolio Watch – targeting stocks for long-term capital growth

Establishing a share portfolio can be one of the best investments you’ll ever make. But like most things in life, success will usually require commitment, dedication and homework. These essentials need to be mixed with personal objectives, time frame and firm decision-making.

Stockbroker Mark Goulopoulos, of Patersons Securities, has established a share portfolio he believes investors should consider for long-term capital growth and offers reasons behind his choices. His portfolio is not a recommendation to buy, but rather an insight into his thought processes for choosing stocks that will be financially rewarding. His capital growth portfolio, built on a two-to-five year view, includes BHP Billiton, Woodside Petroleum, WorleyParsons, Crown, Seek, CSL, Lihir Gold and Westpac Bank.

In building a capital growth portfolio, Goulopoulos is positive about the global outlook, and has chosen resource and energy companies he expects will benefit during an economic recovery. He says BHP Billiton should be the core of any portfolio, as the biggest miner in the world owns a suite of diversified commodities that feed multiple income streams. Iron ore, copper, zinc, lead, uranium, aluminium, coal and petroleum contribute to multi-billion dollar profits amid strong demand from emerging countries, particularly China and India.

“BHP Billiton is the premier resources company in the world,” Goulopoulos says.  He left Rio Tinto out of his portfolio only because he wanted more diversity on establishment, and would gladly include it at a later date. Also, BHP Billiton and Rio Tinto’s plan to merge iron ore production in Western Australia’s Pilbara region gives investors some exposure to Rio Tinto without its debt.

Energy giant Woodside Petroleum is investing in long-term growth for the benefit of shareholders. Goulopoulos says Woodside Petroleum is Australia’s premier energy company with global oil and gas interests. “Profit growth in the next decade will be driven primarily by huge planned LNG stgelopments, beginning with the Pluto project, followed by Sunrise and Browse,” Goulopoulos says. “Also, the company is undertaking high impact exploration, which is likely to further enhance share price performance if it’s successful.”

When establishing a portfolio, Goulopoulos says between six to 10 stocks are preferred for diversity and management. He believes there’s plenty of share price upside in proven performing stocks courtesy of the havoc caused by the global financial crisis.

Goulopoulos says the share prices of junior resource companies can rise on the back of good gains for the majors, but investors significantly increase their risk by investing in speculative companies with little more to offer than a promise. “I’m not against investing in speculative companies, but they don’t fit my definition of generating long-term gains,” Goulopoulos says.

In looking for capital growth, Goulopoulos examines company earnings, cash flow, debt, outlook, sector, economic factors here and overseas, and forecasts. The quality of company management is carefully considered as boardroom decisions drive company performance. Dividend yield takes a back seat in meeting his objective of generating capital growth, but he chooses companies offering a reasonable income.

WorleyParsons is a global leader in providing design, engineering and maintenance services to the energy, resources and infrastructure sectors. Goulopoulos says Worley has delivered strong profit growth in the past few years, and slowing profit growth expected in 2010 is more than reflected in its June 30 share price that is still about 60 per cent below its peak.

“The portfolio I have established is weighted towards my preferred long-term growth sectors of energy and resources,” Goulopoulos says. “Massive structural change is occurring in China and India – rapid urbanisation will lead to higher living standards in these countries.  To construct the infrastructure to enable this urbanisation, massive demand for resources and energy will be underwritten for decades to come. This will be further supplemented by a global economic recovery, which is likely to begin in 2010, albeit slowly in its early stages.”

Goulopoulos expects Crown to be another beneficiary of growing Chinese affluence courtesy of strong gaming growth in Macau. Crown owns the Macau Casino and has an interest in the recently opened City of Dreams Casino. It has the strongest casino businesses in Australia, providing growth through expanding and refurbishing gaming floors, retail areas and hotels.

Goulopoulos says online recruitment company Seek highlights a structural shift in the way companies are doing business. Seek should reward long-term investors as advertising increasingly shifts from newspapers to online. “The short-term slowdown in earnings growth due to the recession and rising unemployment provides an attractive entry point to invest in this company,” Goulopoulos says.

CSL is traditionally considered a defensive stock that has been growing profits strongly for the past decade. “It’s a business with very high barriers to entry and offers further growth potential through the introduction of new vaccines,” Goulopoulos says. “It’s also very inexpensive relative to historical profitability ratios and its expected growth rate.”

Gold is widely viewed as a safe haven in troubled times and stocks and listed vehicles offer exposure to potentially higher bullion prices amid continuing global volatility and uncertainty. Demand for the precious metal in emerging economies is increasing in line with affluence. Goulopoulos says Lihir Gold offers a massive resource base, increasing production and exploration upside on Africa’s Ivory Coast.

While Australia’s big four banks may still face more debt provisioning problems, the global financial crisis has drastically cut home lending competition to their benefit. Despite the recent rally in bank share prices, they are still way off their highs and offer an attractive entry level. The big four are well capitalised and regulated, particularly compared to overseas banks. Australia’s major banks are among the biggest in the world in terms of market capitalisation.  Goulopoulos says Westpac Bank’s balance sheet is much stronger in response to a recent capital raising that should also cushion the impact of any further deterioration in loan quality. “Westpac is now the largest Australian bank on many measures and will participate strongly in a recovering economy,” he says.

TABLE:  Stockbroker Mark Goulopoulos, of Patersons Securities, establishes a long-term capital growth portfolio.