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.

QBE Insurance (QBE)

Diversified general insurance company, QBE Insurance, is on the newsletters’ buy list this week, with the company well positioned to benefit from the softer dollar and tipped to deliver strong growth in the future.

The group recently had its outlook upgraded to stable from negative by ratings agency Standard & Poor’s, which the newsletters took as a vote of confidence in QBE’s financial strength and outlook. The investment press believes new chief executive, John Neal, can turn the business around and enhance operational efficiency.

Last week, QBE confirmed it had received tenders for $US317 million of senior convertible securities, of which $US300 million will be settled in shares and the remainder in cash. The company expects roughly 20 million shares will be issued as part of the tender settlement.

With the debt issues addressed, the investment press is expecting further balance-sheet strength and improvement of underlying earnings. The weaker dollar will also help, since 75% of QBE's premium income is generated overseas. The prospect of rising interest rates in the US will also be of much benefit to QBE, the newsletters say, since the company’s investment portfolio consists mainly of cash and short-term money market securities.

The stock is currently trading at 14 times consensus 2013 EPS estimates, which the newsletters think is far from excessive.

• Investors are advised to buy QBE at current levels.

AMP Limited (AMP)

The newsletters say wealth manager AMP Ltd is well positioned to benefit from the increased focus on superannuation in Australia. One of the fastest-growing super products in the market, AMP Flexible Super now boasts assets under management (AUM) of $8 billion, up from $7.3 billion at the end of 2012.

AMP’s takeover of AXA Asia Pacific significantly extended the reach of its products. This, combined with a growing need for wealth and superannuation advice, will be of much benefit to AMP, the newsletters say. Since the merger with AXA, AMP now has the largest advisor network in both Australia and New Zealand.

In its last quarter net flow update, AMP reported a $95 million inflow into the Australian financial services business, a $387 million turnaround on the previous corresponding period. This was largely driven by strong inflows into the company’s North platform.

Like much of the market, AMP’s share price has seen a correction, and is now at $5 a share, but the newsletters believe the share price will recover over the year as the market regains momentum. All-in-all, the newsletters are positive on AMP and believe investors could see plenty of upside on improved market sentiment.

• Investors are advised to hold AMP Ltd at current levels.

Computershare (CPU)

Computershare has just has completed the acquisition of the Europe, Middle East and Africa (EMEA) segment of Morgan Stanley’s global share plan services business. The acquisition is a means of enhancing the share registrar’s position as the market leader in the European employee plans administration market. It will see Computershare take over the business’s recordkeeping, administration and trade execution services for corporate shares and option-based compensation plans for a range of EMEA-based companies.

The newsletters see the acquisition as a prime example of the company looking for long-term growth opportunities. Expectations of interest rate rises in the US, a stronger US dollar and continued recovery in the US have also led the investment press to take a rosy view on the long-term outlook. A turnaround in M&A activity and IPOs would bring significant benefits to Computershare, although growth in revenue in the short term is likely to be muted until then.

Steps taken by the share registrar to increase exposure to non-market businesses is also viewed in a favourable light by the investment press, and the company’s strong track record with acquisitions should see it derive benefits from this exposure as it seeks to build scale. The company’s healthy balance sheet, low capital requirements and benefits of scale are all listed as enhancing its long-term growth prospects, as is the company’s competitive advantage due to the advanced technology employed.

• Investors are advised to hold Computershare at current levels.

Newcrest (NCM)

When Collected Wisdom last looked at Newcrest Mining in February, the newsletters had it as a long-term buy. But last week’s events have seen Newcrest fall firmly out of favour among investors and the newsletters alike.

The gold miner’s share price plunged 20% in the space of four days last week, but the newsletters say what really got investors riled up was its awful handling of the latest market update and $6 billion worth of write-downs. On Friday, the gold miner said it would write down the value of its Lihir operation in Papua New Guinea by $3.6 billion and the value of other operations including its Telfer, Hidden Valley and Bonikro mines by $2.2 billion.

Capital expenditure for the FY 2014 has been cut from $1.5 billion to $1 billion, while its exploration budget will be reduced from $160 million to $85 million. There will also be no final dividend issues this year.

Preceding last week’s dire announcement were downgrades from five of the major brokers, which raised a number of eyebrows. The Australian Securities & Investments Commission is now investigating whether the company gave any briefings to the brokers prior to the announcement.

The steep share price fall has led some to re-rate Newcrest a buy, but much of the investment press sees additional risk to earnings ahead with continued uncertainty for the gold price, although a continued decline in the dollar would lead to improved production margins.

• Investors are advised to sell Newcrest at current levels.

Seek Limited (SEK)

Seek’s share price performed strongly for the first four months of the year, gaining 60% on the back of a solid market position and diversified earnings, but half of that gain has been pared since then. Nonetheless, the newsletters are still of the view that the current valuation is quite stretched, and with the employment market remaining weak rate Seek a sell.

The fall in ANZ Australian job ads in May was the 21^st straight month of year-on-year declines. Job ads dipped 2.4% in the month and are 18.5% lower over the year.

Fairfax’s rival online jobs website, MyCareer, is moving to a free online listing model in an attempt to steal market share from the market leader. The newsletters aren’t too concerned with this development yet, as advertisers are still likely to go with the site that has the biggest online audience, which is still most definitely Seek. It currently captures over 80% of time spent searching online for jobs.

But the increased use of social networking sites like LinkedIn and Twitter to advertise jobs is a threat to Seek’s dominance over the longer term. As the way jobs are advertised continues to evolve, Seek will have to try to stay ahead of the game if it’s to retain its market share.

• Investors are advised to sell Seek Ltd at current levels.

Watching the Directors

• Cochlear chief executive Christopher Roberts took advantage of the slump in the share price after the company’s profit downgrade, snapping up 4,000 shares at $54.975 apiece. Not one to be left behind, Cochlear chairman Rick Holliday-Smith also went on a buying spree, buying 2,000 shares at $55.548 shares each.
• Elsewhere, Primary Healthcare managing director, Edmund Bateman, spent $390,850 for 78,000 shares in the company, bringing his total holding to 23,830,424 shares.
• On the selling side, GBM Gold executive chairman, Ian Smith, disposed of 12,289,000 of the company’s shares, netting himself $207,782, while non-executive director, Stuart Hall, sold 5,882,000 shares for $99,994.