Collected Wisdom

This is an edited summary of Australia’s best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.
The fallout from the Opes Prime affair means that there are plenty of holdings in small companies going on to the market, pushing down prices for some companies, pushing them up for others. While numerous trading and value opportunities are being borne down at the speculative end of the sharemarket, the stock-picking newsletters are by and large avoiding the penny-dreadfuls in favour of more established equities, some of which we have seen in this column in recent weeks. Today we re-examine a few of these and pick up a few more tips along the way.

QBE Insurance (QBE), which was covered here on March 26, gets another Buy recommendation. Today’s opening price of $24.60 is well up on last week’s $22.36 but is still cheap when compared to its 52-week high of $35.49. The insurance group is now returning to prices last seen in February, before a dismal March in which it was hammered along with other insurance and financial stocks. Although the best value buying time has probably passed, prices are seen returning to higher levels and QBE’s price/earnings ratio is still relatively low at 11.4 times. QBE’s management has delivered solid net earnings growth and has expanded its offshore operations significantly. Because it earns 70% of its income overseas – most of it in North America and Europe – the appreciation of the Australian dollar has hurt the bottom line, but as one newsletter puts it: “All the bad news is in the stock price.” Buy QBE around current levels.

Another stock that has been featured in previous columns is Lihir Gold (LGL). Lihir was given a Sell recommendation last week and was seen as a Speculative Buy the week before. This week it is once again seen as a speculative buy at about $3.53, where it currently hovers. Unhedged to a perhaps overheated but nevertheless bullish gold price just under $US950, Lihir is doubtless a more risky proposition whether you are going long or short. Looking beyond the fluctuations of gold in the short term, however, one newsletter sees Lihir’s merger with mid-tier player Equigold as a strategic and intelligent move in terms of geographic and production diversification. If the West African birimian greenbelt of war-torn Cote d’Ivoire – where Equigold has a focus – is not your cup of tea then don’t despair, the world-class ore body at Lihir Island off Papua New Guinea still hosts 35 million ounces in resources. Lihir has also said it has identified exploration potential of 9.2 million ounces near Ballarat in Victoria, a significantly less volatile region, at least since the Eureka Stockade in 1854. LGL is (once again) a Speculative Buy at current levels.

Also in resources and also in the midst of a merger play is Oxiana (OXR), last covered in this column on March 10. Oxiana is given a Buy at current levels, opening today at $3.12, based on the likely success of its bid for Zinifex (ZFX). With Tom Elliott today agreeing that this merger is more likely than not (click here), and with Zinifex sitting on a ton of cash, as well as the Century Mine in north-west Queensland and the Rosebery mine in Tasmania, Oxiana’s weak share price is seen as a buying opportunity. With a price/earnings multiple of 15.9 times, its share price is not as cheap as companies outside the resources space, but a 52-week high of $4.32 puts its current price in perspective. Oxiana is a buy at current levels.

Continuing on the theme of cheap resources companies in play, BHP Billiton (BHP) and Rio Tinto (RIO) have both been given Buy recommendations this week. Nudging $40, BHP has bounced back from a January 22 low of $31, but is still significantly lower than a 52-week high of $47.70. Rio is similarly off January’s recent low of $99.52, currently around $130–135, but that’s still cheap when compared to November and December when it approach $150. Coking coal and iron ore are behind the recommendations for these two giants, with growth in China still pushing up demand for the two key ingredients for steel production. Coking coal, which is very important to BHP, has seen strong price rises recently, and iron ore, which is very important to Rio (and also, to a lesser extent BHP), is also strong. Both companies are large, have pricing power (see Robert Gottliebsen’s pick of top pricing power stocks), geographic and commodity diversification, and enjoy good management. Buy BHP and Rio at current levels.

Another top pricing power stock that gets a recommendation is Telstra (TLS) and T3 (TLSCA), which featured in Eureka Report on March 31 (see T3 still makes sense). Telstra is trading in a $4.50–4.55 band and T3 is moving between $2.90 and $3. These levels are approximately half way between 52-week highs and lows, so although the stocks are not bargains, they nevertheless represent good value and with the Federal Government terminating the Optus-Elders (OPEL) regional broadband network agreement, Telstra is all set to go with its $8 billion fibre-to-the-node network, of which the Government will fund $4.7 billion. The Government has placed a high priority on this network and, if friendly relations continue, the impact of third party access and competition may be mitigated. Telstra also continues to perform strongly across all segments and chief executive Sol Trujillo’s turnaround of the former government monopoly appears near completion. Dividend yield on these stocks is also a plus and readers of one newsletter are advised to accumulate Telstra and T3 at current levels.

Returning to the swathe of companies that are in play, Just Group (JST) features as a Buy recommendation in one newsletter, following a bid by Premier Investments Limited (PMV), the cashbox headed by retail mogul Solomon Lew. Lew’s timing was heralded in Tom Elliott’s column last week (see Lew’s timing Just perfect) as impeccable and this week the Buy recommendations continue. While Tom suggests this week (click here) that Just with Solomon Lew in charge could possibly be a better company, the newsletters recommend readers reject Premier’s overture as undervaluing Just’s intrinsic value. The “fast fashion” retailer, which covers brands such as Just Jeans, Peter Alexander, Portmans and Jay Jays, featured in this column on March 10 as a Buy recommendation, having booked a first-half net profit of $40.1 million, up 3.1% on the previous corresponding period. The outlook still looks strong, and with the wisdom of Solomon backing up the newsletter picks, prices are likely to rise further. The retailer is currently trading around $4–4.10, at a discount to the Premium offer of $4.11–4.46, so Just remains a strong buy recommendation.

Completing this rather bullish week of Buy recommendations, Ten Network Holdings (TEN) earns a tick based on industry-leading EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 37% and a payout ratio of close to 100% of earnings. Hurt by investor fears of a slowdown in consumer discretionary expenditure, the broadcaster’s leverage to the general economy has sent shares down to the $2.25–2.40 band in which it currently trades, from a 52-week high of $3.26. Ten, which is 57% owned by Canadian media group CanWest, is still likely to see a slowdown in revenues and a contraction in margins this year, but current prices nevertheless present good value. Seen at an intrinsic value of around $3 per share, Ten is a buy at current levels.

Watching the directors

Week to April 3

• Christopher Aylward continued his buying spree in APN/UKA European Property Group (AEZ) with a $4.5 million transaction.
• More buying into Bell Financial Group (BFG), with Colin Bell picking up $136,000 worth of shares.
• Robert and Michael Millner just bought $391,000 worth of Brickworks (BKW).
• Lots of buying by directors of Horizon Oil (HZN).
• More buying by directors of Linq Resources Fund (LRF).
• Continued buying by Adrian Fini into Little World Beverages (LWB).
• Robert Millner just bought $241,000 of shares in Newhope Corporation (NHC). That makes almost $1.5 million over the past four months.
• David Reed is buying into Reed Resources (RDR).
• Lim Kim Hai picked up $661,000 worth of shares in Regional Express Holdings (REX).
• A few directors are buying into Transfield Services Ltd (TSE).
• More buying into Transfield Services Infrastructure fund (TSI).
• Some pretty big buying into Vision Group Holdings (VGH).
• Nic Limb bought a substantial holding of Gippsland Offshore Petroleum (GOP) through a holding company on behalf of his superannuation fund.

Previous week

• Three directors buying shares in Advanced Engine Components Limited (ACE).
• Christopher Aylward has been continually buying parcels of shares in the APN/UKA European Property Group (AEZ).
• Continued buying by the directors of Customers Limited (CUS).
• Buying by multiple directors of Envirozel (EVZ).
• Philip Parker and Peter Brown are both buying shares in FKP Property Group (FKP).
• The directors of GRD Limited (GRD) have been buying parcels of shares.
• Continued buying by multiple directors of Little World Beverages (LWB).
• Continued buying by the directors of Magellan Flagship Fund (MFF).
• Buying by three directors of Transfield Services Infrastructure Fund (TSI).

nRecent directors’ trades worth more than $200,000
Date	ASX	Director	Quantity	Price	Total	Action
13/03/08	PRY	Edmund Bateman	170,780	5.683	$970,556	BUY
13/03/08	GBT	Joakim Sundell	200,000	2.05	$410,130	BUY
12/03/08	FKP	Peter Brown	70,000	2.88	$201,600	BUY
12/03/08	PGA	Timothy Hughes	60,179	4	$240,716	BUY
12/03/08	HVN	Gerald Harvey	2,000,000	3.891	$7,781,000	BUY
11/03/08	PRY	Stephen Higgs	97,000	5.146	$499,181	BUY
11/03/08	CEH	Hua Seng Chew	915,000	0.5	$S457,500	BUY
11/03/08	AIO	Mark Rowsthorn	1,669,456	3.708	$6,189,559	BUY
11/03/08	QGC	Dale Elphinstone	200,000	3.49	$698,000	BUY
10/03/08	MFF	Chris Mackay	469,678	0.605	$284,172	BUY
07/03/08	CEH	Hua Seng Chew	573,000	0.5	$S286,500	BUY
07/03/08	CPU	Christopher Morris	100,000	7.965	$796,472	BUY
07/03/08	PPX	Thomas Park	100,000	2.208	$220,810	BUY
07/03/08	PRY	Edmund Bateman	296,981	5.152	$1,530,076	BUY
07/03/08	SUN	Zygmunt Switkowski	40,000	11.45	$458,000	BUY
07/03/08	DOW	Geoff Knox	400,000	6.18	$2,472,000	BUY
07/03/08	HHL	Peter Hall	23,827	10.8	$257,332	BUY
Source: The Inside Trader and Eureka Report