Collected Wisdom

Strong price gains for commodities have pushed the Rio Tinto (RIO) share price north of $110 over the past week before easing. Rio Tinto’s exposure to iron ore has played a large role, with long-term forecasts rising by more than 50%. Importantly, Rio Tinto has far larger exposure to iron ore than BHP Billiton; however BHP has had a much stronger run this year putting on about 80% compared with Rio’s 57%. Rio Tinto is also fully diversified, with large interests in copper, coal, diamonds, gold, uranium and aluminium courtesy of the Alcan purchase. This acquisition will prove crucial, the debt-funded purchase delivering the company with greater leverage to this expanding sector. In hindsight, it’s hard to believe that Rio Tinto was as cheap as $70 at the beginning of the year. The stock is well managed and suitable for risk-averse investors. Believers in the story of our “stronger for longer” resources sector should be looking to top up their holdings. Buy Rio Tinto up to $110.

The distressed business model of Rams provided Australia’s banks with the perfect opportunity to cherry pick its best components. Despite rumours that National Australia Bank was building a stake, on October 2 it emerged that Westpac (WBC) had made an offer for its brand and distribution network. Westpac believes that these are undamaged and snapped them up for the bargain price of $140 million in the tradition of other great financial services fire sales, like State Bank of Victoria and the Bank of NSW. Analysts are divided over whether it’s a good idea for Westapc to maintain a separate brand considering it wasn’t that long ago that it wound up the Bank of Melbourne brand. Analysts at Wilson HTM have released a note suggesting that, based on return-on-equity, the deal doesn’t make sense and the case for investment is more likely to have been based around growth. Westpac hit a high of $29.01 after the news and has drifted ever since, producing an entry point for investors with a bit of bottle. Acquire Westpac at current levels. (To see Ian Rogers’ note on Rams from Eureka Report on Friday, October 5, click here).

Investors looking for opportunities in the food and retailing sector might benefit from looking beyond Coles/Woolworths and more closely at Goodman Fielder (GFF) and Metcash. Goodman Fielder is a defensive stock that manufactures food staples such as bread and margarine. The industry is highly competitive and susceptible to heavy discounting, which limits earnings-per-share growth to about 10%. Higher oil and wheat prices have crimped existing margins, with customers reluctant to absorb higher costs. Goodman has made half a dozen acquisitions over the past year and is looking towards the Pacific Rim for more expansion opportunities. However, Goodman has been vague on profit guidance with management suggesting it expects “to deliver further profit improvement”. Goodman Fielder is suitable to investors seeking income. Acquire Goodman Fielder to $2.60.

On the distribution side is Metcash (MTS), which delivers supply services for independent grocers who operate under the IGA brand. The company has made solid inroads on market share in the absence of any real competition from Coles. Analysts expect that Coles will remain soft for another 6–12 months. A renewed focus on automation, warehouse consolidation and shared marketing services is long overdue. Recent results showing single-digit growth in EBIT were disappointing, yet most analysts have reaffirmed forecasts for profit growth of about 20%. Metcash is still about 13% off its April high of $5.34 providing canny investors with a good entry point to this competitive market. Acquire Metcash to $4.80.

Minara Resources (MRE) has been brokers’ favourite until recently. Between May 22, 2006, and May 22, 2007, the stock rose a staggering 380% before moving into a steady decline which saw it bottom out at $4.60 on August 17. One trading publication believes Minara is a good inclusion to any medium-term holding on account of its 11% dividend and dramatically low price-to-earnings ratio of 6. The company is Australia’s second largest nickel producer and one of the 10 largest worldwide. The number of brokers that have elevated their recommendations to “Buy” over the past few weeks now numbers 10. An overhaul of the Minara project over the next few weeks will be crucial. The downside of the overhaul may be the discovery of systemic problems, while the upside will be increased capacity. Suitable for investors with a higher risk profile. Buy Minara Resources at current prices.

Brickworks (BKW) is a geographically diverse brick manufacturer with prominent businessman Robert Millner of Washington H Soul Pattinson as its chairman. It has recently undergone a wave of positive investor sentiment as it announced plans to sell off various “brick pits” that occupy prime suburban land. Brickworks ($13.97) stands to benefit strongly from a recovery in NSW housing but there is no significant uptick in activity just yet. Recent results showed that net profit rose around half a percent to $102 million, which is overwhelmingly positive given the circumstances. Looking forward, estimates for full-year profits in 2008 sit at about $112 million and $125 million for 2009. Acquire Brickworks to $14.30.

One stock tipper continues to fly the flag for micro-cap oil explorer and producer Incremental Petroleum (IPM). The company’s main asset is the Selmo oil well in Turkey. The well was discovered by Mobil in the 1960s and has changed hands a number of times before being picked up by Incremental. The oil field is estimated to have about 500 million barrels of oil yet only 83 million barrels have been recovered to date, which may go some way to explain its succession of owners. More recently the company has expanded its portfolio with a 45% stake in a five-well exploration venture in Turkey’s west. The stock has fluctuated between $1.65 and $1.15 over the past 12 months and has spent the past six weeks hovering around $1.42. Despite the potential for sovereign risk and underperformance over the past year one report maintains its unbridled optimism for this highly speculative opportunity. Incremental Petroleum is a speculative buy at current levels.

Watching the directors

Week to October 5

• Paul and Andrew Bassat, the brothers who share CEO duties at Seek, each sold around 920,000 shares in the company, netting them both a shade over $8 million.
• Katie Page, managing director of Harvey Norman and wife of founder Gerry Harvey, took advantage of the strong retailing conditions to sell one million shares for just under $6 million.
• Meanwhile, Andrew “Twiggy” Forrest has picked up five million shares in Poseidon Nickel for the sum of $2 million.
• Jeffrey Harding of Ceramic Fuel Cells (CFU) picked up $40,000 worth of shares at 80¢ each. The share price has fallen from $1.10 over the past couple of months.
• John Terpu bought $365,000 worth of shares in Conquest Mining (CQT).
• Peter Jones of Envirozel (EVZ) just picked up another $50,000 worth of shares. This adds to $50,000 worth purchased a couple of weeks ago.
• David Carruthers, a director of Genetic Technologies (GTG), picked up $21,000 worth of shares last week.
• More buying by George Sakalidis into Image Resources (IMA). This time he bought $54,000 worth of shares, making his total purchases this year almost $900,000.
• Garry Hounsell of Mitchell Communications (MCU) just bought $200,000 worth of shares. The week before he bought $521,000 worth.
• Christopher Cooper of Redflex Holdings (RDF) just bought $129,000 worth of stock.
• Buying by two directors in Select Harvests (SHV). That makes more than $700,000 worth of shares purchased in the past six weeks.
• More buying by directors in Solagran (SLA) this week.
• Michael Millner of SP Telemedia (SOT) just bought almost $250,000 worth of stock.
• Tamara Resources (TMR) has just seen Hugh Callaghan and Michael Fischer buy some shares; $29,000 and $103,000 respectively.
• Here's a big one! Terrence Peabody of Transpacific Industries Group (TPI) has just bought over $40,000 worth of stock over the past two weeks.

Previous week

• Buying by two directors, Julian Hanna and Terence Streeter, of Western Areas NL (WSA).
• Hanna has just purchased over $1 million worth of shares. This follows on from a lot of buying activity over the last couple of months.
• Two directors, Terence Hogan and Craig Rosendorff of Venus Resources (VNS), have recently purchased stock.
• Gerry Masters, a director of The Reject Shop (TRS), has purchased stock in four transactions over the past month.
• Michael Millner, a director of SP Telemedia (SOT), has recently purchased shares. The SOT share price has fallen considerably over the past few months.
• Buying by two directors of Fairfax Media (FXJ).
• Buying by two directors of Just Group Limited (JST).
• Mark Scott, a director of Jindalee Resources (JRL), has purchased about $150,000 worth of stock in three transactions over the past fortnight.
• Almost $200,000 worth of stock purchased by Kenneth Moss, director of Centennial Coal Company Limited (CEY).
• Buying by Tan Yam Pin, a director of BlueScope Steel (BSL). He has bought just over $100,000 worth of stock.
• $275,000 worth of stock purchased in the last few weeks by EG Albers, a director of Bass Strait Oil Company (BAS). Another director, Andrew Adams, purchased a parcel of shares in late August.

Source: The Inside Trader