End of year wrap - part 2

As I look back on 2015 (James Carlisle's effort, the first in this two-part series, is here), there's the sense of a few pennies dropping into long-empty slots.

As long term sceptics of a never-ending mining boom, there was no satisfaction in seeing commodity prices crash, particularly as it crushed some of our recommendations in the sector. The rapidity of the oil price fall was a shock, although there was an inevitability about where we ended up, if not a little surprise about how quickly we got there.

What wasn't a surprise was reality finally hitting the yield obsession. In Dividend cuts: the stocks most at risk two stocks fell into our 'alarmed' category. Origin Energy has already cut its dividend and Woodside surely will. A further six stocks - the big four banks, Woolworths and IAG - are looking more likely to do so. The banks already make extensive use of dividend repayment plans and are primed for a cut.

The Australian dollar has fallen with commodity prices, ending at least one of the reasons to internationally diversify one's portfolio. As recently as March, when we published Sell Commonwealth Bank and buy this stock instead, penned by yours truly, this window was still slightly ajar. At the time CBA was up at $93.10 and has since fallen 12%, while Wells Fargo, the suggested replacement, has risen 7% in Aussie dollar terms.

Unfortunately, that undermines rather than strengthens the argument for overseas investment. In April 2013 the local currency still briefly traded above US$1 but has fallen rapidly since and is down around 15% this year. There are still some good reasons to seek international diversification (see here and here) but a strong local currency getting us more bang for our buck isn't one of them. Of course, that hasn't stopped the product manufacturers from climbing aboard a train that has already left the station.

As Australia struggles to make the transition away from digging stuff up to something more sophisticated, the recession threat remains. That doesn't change the fundamental task of an intelligent investor one bit. Just like last year, 2015 was all about stock picking. Next year will be the same again. With that in mind, let's look at the your analysts nominations for best article (as opposed to best recommendation) starting with research director James Carlisle.

James Carlisle

CSL: Australia's best resource stock was a two-part series that ended, rather boringly, with a Hold recommendation. It did, however, offer some justification for owning a stock that's tripled in price since we upgraded it to Long Term Buy five years ago. The enlightening way in which analyst Graham Witcomb explained the business model made it James' stand-out article. Graham, thought it was his best work, too.

James also noted two articles that book-ended the market's mid-year tumble. Your bear market survive and prosper plan by former research director Nathan Bell is required reading for members buying stocks in the face of tumbling prices. Urging members to use such periods to get rid of mistakes, look for the best opportunities and sell cheap for cheaper, this is a timeless, valuable piece.

Markets down, optimism up, written by me at the height of the panic in August, showed the value investing philosophy in action. Many of the stocks recommended in this period have since jumped considerably, illustrating the benefits of buying in periods of volatility and bad news. For non-stock article of the year, James invited me to give myself another plug for What's special about Warren Buffett (and what isn't) Pt 1 and two.

James Greenhalgh

Senior analyst James Greenhalgh nominated another Witcomb article, Austbrokers faces new threat, (Sell - $9.00) as his favourite. Not only did Graham detail some 'interesting structural changes affecting the industry but it also had 'lots of great one-liners', always a bonus. Although they don't get as much attention as Buys, our Sell recommendations are just as crucial. Research pieces like this help members keep mistakes to a minimum, boosting overall returns.

James also gave special mention to a number-heavy and detailed piece called Virtus, Monash and the $30,000 babies. Also by Graham, it was a contrary piece showing the value of independent thinking in a sector where we've found some value this year.

As for his own work, James picked Is Myer still a pariah? (Buy - $0.943), a stock he has been watching for years that finally made it onto our Buy list (and then quickly departed). This review showed we weren't wedded to past views and how demonstrated how stocks that aren't necessarily attractive can become quite cheap.

The research demonstrated a variety of valuation approaches, including looking at overseas stock comparisons, recent department store assets purchases and showed the importance of cash flow to valuation. Whilst profits have been declining, cash flow looks good and should continue to be so. After quickly rising 22% after the upgrade on 11 Nov 15, we'd love to see a price fall that would allow us to get this stock back on the Buy List.

Gaurav Sodhi

Deputy research director Gaurav Sodhi also nominated CSL: Australia's best resources stock as his pick for article of the year, calling it a 'thoughtful and imaginative take' on that business that 'generated a key insight into the strength and competitive position' of this exceptional business.

As for his own work, he thinks 'the most important thing I wrote all year was Electricity disrupted Pt 1 and part two', which showed how the century-old electricity business model is being upended whilst 'almost no one outside the industry notices'. This is indeed a big deal that's receiving remarkably little attention in the mainstream. Gaurav didn't notice that he actually wrote this piece the year before but no matter. It neatly illustrates the importance of understanding business models as much as valuation and is well worth a re-read. And if you haven't yet read The resources rout special report, his latest work, please do so.

Andrew Leggett and Jon Mills

Despite being surprised by the rapidity of the fall in the price of oil, junior analyst Andrew Leggett felt that Gaurav's Origin, Santos and the oil price 'did a great job of explaining the key factors affecting the oil industry' and how they related to our (poorly-performing) recommendations on these two stocks. For his own articles, Andrew nominated the float of Bitcoin Group and a blog post titled Time to go hunting. This latter short piece is especially valuable to members concerned by share price volatility, explain how waiting for markets to become 'normal' entails passing up on bargains.

Finally, to analyst Jon Mills who landed on the same subject matter as Andrew in his selection of  Einhorn vs Klarman: the future for shales as his article pick of the year. Gaurav's review of Antares is essential reading if you want to understand the dynamics in this key part of the oil sector.

From his own body of work, Jon picks out A-REITS expensive on almost every measure. This mammoth wrap of 24 stocks in the sector used the word 'Avoid' 17 times and 'Buy' not at all. The rush to yield has destroyed any semblance of value in this sector and Jon's clear-eyed research did a fine job of ensuring members didn't over-pay. In the words of members Rob & Julie A, a 'top class review'. Incidentally, a quick shout-out to Jon: his analysis and writing have come on in leaps and bounds this year with his hard work and original thinking a great asset to the team. Well done, Jon.

That's it then, an entirely subjective view of this year's research highlights. If you're looking for something to do over Christmas whilst watching the West Indies take another beating, this list of highlights is a good starting point. And if you have your own nominations, please leave them in the comments section below.

Disclosure: Staff own some of the stocks mentioned in this article.