Collected Wisdom

This week’s roundup of the investment newsletters:
Fat Prophets

This week the team at Fat Prophets is ignoring the noise from private equity juggernauts and concentrating on three long-term themes. The first is the China growth story. Accounting software company MYOB (MYO) has had a rollercoaster ride since listing in June 1999 and, like many other technology stocks, it was trading at ridiculous multiples at the peak of the dot-com insanity. Fast forward three years and you’ll find the stock has been more comfortable trading in a range between $1 and $1.50. During this same period the company has been quietly building business in Hong Kong, which offers access to China. With a price/earnings multiple of 21, it’s no bargain. But its healthy balance sheet is perfectly able to take on more debt for the push into China. Hold MYOB at current levels.

The second theme is energy. Fat Prophets believes that exposure to the energy sector is crucial to the long-term performance of any portfolio. By looking at out-of-favour companies, the team has identified Oil Search (OSH) as a long-term buying opportunity. The company’s value is derived from its large holdings in Papua New Guinea with upside to come from oil fields in the Middle East. The markets obsession with immediate results led it to mark Oil Search down unfairly in response to production delays in PNG. Buy Oil Search at around $3.36.

The third theme from the newsletter is gold. With a five-month correction only now beginning to thaw, the team believes Lihir Gold (LHG) offers good exposure to the market, but is not without risk. Although the company’s track record with hitting production targets is poor there is enough going on at the company to remain excited about. New projects, a cost structure overhaul and a merger with Ballarat Goldfields are all good reasons to revisit the stock. Hold Lihir Gold at current levels.

Criterion

Over at The Australian, the author of the Criterion column, Tim Boreham, has calmly pointed out that with all the kerfuffle over the possible acquisitions of the proposed Publishing & Broadcasting (PBL) spin-off that the potential of the old company has been ignored. However Publishing & Broadcasting’s expansion into gaming is not without risk as there are currently very high prices being paid for casino assets. PBL is a long-term buy.

After a period of extraordinary growth, the Dominos (DMP) fairytale seemed to come to an abrupt end on October 19 when first quarter figures came in $1.2 million under budget. This wiped out 18% of the stock’s value immediately, not surprising considering since figures were about 40% below guidance. Avoid Dominos.

As Perpetual (PPT) looks offshore to invest its money, its stock price and the Australian indexes are drifting further apart. The company’s funds under management rose by 5% to $34.5 billion over the September quarter and only $20 billion of that is invested in Australian equities. Currently experiencing some cyclical softness, Perpetual is a long-term buy.

Huntley’s Your Money Weekly

Huntley’s Your Money Weekly also likes the prospects of Perpetual (PPT). Recent legislative change regarding superannuation should see a steady increase in funds under management for some time to come. After reaching an all-time high of $76.10 on October 11, the annual general meeting dampened some of the optimism surrounding the stock. Modest guidance of 10% net profit after tax has been explained as a reflection of a slow September quarter where the All Ordinaries rose just 2%. Yet its exposure to new markets such as the Dublin fund management industry should reduce the impact of this sluggishness by years end. Accumulate to $75.

Innovations in manufacture and marketing at Pacific Brands (PBG) are responsible for the resilient share price of the stock, which has recovered significantly from its June lows. The company’s experience with acquisitions is positive, with last year’s purchase of Sheridan Bedding providing the company with much needed growth. With the bolt-on acquisition of clothing manufacturer Globe International likely to take place any day now, the current strategy of management is likely to deliver good earnings growth over time. The fully franked dividend of 6% is another plus for investors seeking income. Accumulate Pacific Brands to $2.70.

Investors with higher-risk profiles would do well to examine the manufacturer of sleep disorder products ResMed (RMD). The company has delivered shareholders earnings growth of about 20% over the past five years and the management team is routinely praised in the US business bible Forbes magazine. Companies such as ResMed need to continually remain ahead of the pack and its pleasing to see the company invest about 6% of revenues in research and development. Separately, it has been granted around 450 patents and has another 600 pending. Accumulate ResMed to $5.32.

Rivkin Report

The removal of the takeover premium associated with Coles Myer (CML) was an expected consequence of KKR walking away from the retailer. Selling for about $3.55 on September 20, the Rivkin Report believes that stock has potential to fall as far as $12 before bottoming out. While other companies in the industry are trading on multiples of about 17, the team believe a discount should be applied to Coles Myer on account of its new strategy. Valuing the company at 15 times earnings puts the stock at about $13.50. The newsletter recommends selling Coles Myer at no less than $13.50 or making long-term purchases in Coles Myer at about $12.

After sticking with underperforming print media technology company PMP Limited for many years the team has identified now as the time to exit the stock. The current frenzy that has engulfed the big media companies has filtered though to ancillary services such as PMP, unlocking decent value for shareholders. There are rumours of a takeover but with an upside of 10¢ compared with a downside of 40¢ the report recommends that you sell PMP at about $1.88.

Investors in JB Hi-Fi (JBH) have had a magnificent run. After listing for $2.20 in October 2004 the stock has more than doubled and was trading for $5.59 at the close of trade on October 20. Although pleased with the appearance of Commonwealth Bank on the register there is some concern that the stock is moving too fast for a retailer. There might still be further upside but hold JB Hi-Fi at current levels.