Brokers hint at sharing mood for festive season

AS YOU'RE lying on the beach these summer holidays, probably the last thing you want to be doing is checking your shares every hour on your iPhone.

Well, you're not alone.

We normally associate the festive season with buying but for many retail investors, particularly the more active traders, the onset of the Christmas period represents a time to lighten the portfolio.

Holidays and market monitoring don't go hand in hand. Particularly this year, as unstable global economic conditions are likely to leave many investors loath to being exposed to wild swings in share prices at a time when they're trying to take a break from a stressful year in the markets.

Another factor that triggers selling is the need to cash up to afford that well-earned holiday. Investors usually look to hold on to stocks that represent a significant capital loss in the hope of a turnaround.

Consequently, it is often good quality stocks, which provide shareholders with a profit, that are sold off during this period.

This trend is likely to be even more prevalent in the coming months and it has the potential to drive down stock prices and, in some cases, create buying opportunities.

Setting aside 2011, if one looks back over the previous 10 years, there was only one occasion when the S&P/ASX All Ordinaries index fell substantially between the start of January and the end of October.

That was in 2008 when it recorded a decline of 2439 points. But there was worse to come - between November and the end of December the index shed another 358 points. It is worth noting that in the third week of November it hit a low of 3201 points, representing a fall of 781 points - or nearly 20 per cent.

We entered December with the index down by 674 points, suggesting that it may be time to identify some stocks that have performed well in 2011 but appear to have come under unwarranted selling pressure that could be sustained over the coming weeks, potentially providing contrarian investors with a buying opportunity. Here is a six-pack to savour over the coming weeks.

Stocking fillers

With delays in business spending well documented in recent months, IT services stocks have fallen out of favour. However, it was only on Wednesday that analysts at UBS revisited the sector following first quarter trading updates for 2011-12.

The broker is of the opinion that the industry outlook is not as dire as it was in 2009-10 and that the share prices of some companies have been marked down well below fair value and factored-in worst-case scenarios. UBS was praiseworthy of Oakton's and SMS Management and Technology's net cash-per-share positions.

Based on the broker's earnings-per-share forecasts for 2011-12, the companies are trading on price-earnings multiples of 8.3 and 10.2 respectively.

These companies both have a long history of outperformance and generally trade on much higher multiples than currently applicable. UBS has a price target of $6.05 on SMS Management and Technology and $2.15 on Oakton. By comparison, SMS hit a 12-month low of $4.42 on Wednesday and Oakton is also trading close to its 12-month low of $1.36.

In the engineering and construction sector it is hard to go past Cardno but, despite extremely positive news flow and the company's impeccable history of outperformance, it is trading on a forward price-earnings multiple of less than 10.

Cardno's diversified business model provides multiple revenue streams from a variety of geographic areas and industry sectors. This is the ideal situation during periods of volatility as the company can tap into areas that remain buoyant.

Cardno has grown its environmental services business, particularly in North America where the company played an active role in addressing problems relating to the Gulf of Mexico oil spill.

NRW Holdings is more of a specialised mining services play but one of the company's main attributes is its earnings visibility. There is no wondering whether this company is going to win tenders - it has a $2.2-billion order book, with some work extending as far out as 10 years.

While NRW's share price has gained support in the past week following a profit upgrade, it is still trading well short of broker 12-month price targets.

Both Deutsche Bank and UBS have buy recommendations on the stock with 12-month price targets of $3.50 and $4.10, respectively. Both brokers have just substantially upgraded earnings forecasts for 2011-12 and 2012-13.

News released this week by the Australian Bureau of Statistics indicates that global uncertainty is not affecting investment in the sector and that the amount expected to be spent on construction and equipment in 2011-12 has risen significantly in the past three months to $158 billion.

Surprisingly, Boart Longyear's share price fell from a high of about $5 in April to a recent low of $2.34. This is hard to explain given that the company is expected to generate earnings-per-share growth of nearly 70 per cent in 2011-12. It is also trading on a forward price-earnings multiple of less than 10.

On Thursday, the company's management reaffirmed earnings guidance for the 12 months to December 31 and indicated that there was the possibility of exceeding current estimates.

The share-price movements of Independence Group are also hard to fathom. In the past 12 months, the company has expanded into a truly diversified mining house with the acquisition of Jabiru Metals and, looking to the future, it has high-profile projects such as the 5.3-million ounce Tropicana gold joint-venture coming on stream in the second half of 2013.

But its share price has fallen from more than $8 at the start of the year to trade as low as $4.24 last week, despite the fact that it is forecast to achieve a three-fold increase in earnings per share over the next three years.