Eureka Correspondence

Dick Smith Holdings

I have been a subscriber for many years. Decided to follow a recommendation by you. DSH with a recommended target of $2.70.

I am soooooooo disappointed!! Not sure I can trust your recommendations any more. I know this is only one stock but it will take a lot for me to be convinced in the future. Don't expect you to know everything but this one should have been in some way foreseeable.

Rick

James Samson's response: Firstly thanks for taking the time to write and provide the feedback. It is definitely not falling on ‘deaf ears'. I am the analyst covering DSH, and certainly share your disappointment with the company.

My view is that the market has sold this share down to quite ridiculous levels, taking a view that the company is on the verge of serious trouble. I disagree with this view, I believe the market is taking a bet (or shorting) on this type of scenario and it is being misled. To read my latest update on the outlook for DSH click here.

One point I need to make clear is that at Eureka Report and working with Eureka's investment committee we have strict guidelines in relation to the allocation of any portfolio towards any individual stock: The logic behind this structure is to cushion the negative effect of bad news from any one stock. In the case of DSH and the Income First model portfolio – it had a weighting of approximately 6 per cent at the time of the downgrade.

I certainly hope that you can take some solace in the fact that our Income First model is well diversified and that DSH's dramatic and unexpected 60 per cent fall in price has been cushioned by our allocation structure to the point that we are comfortable the portfolio will achieve all its objectives.

Possible future stock picks

I'm wondering if you intend to include a watch list of potential stocks for future adding to the portfolio. It adds a dimension to the models if we can read the reasons for stocks to be on the watch list as some investors looking for diversification may find a stock they haven't considered in different sectors of the market.

Ian

Editor's response: Thanks for your letter. We'll keep your idea in mind. In the meantime, you might also be interested in Mitchell Sneddon's most recent article, where he talks about his plans for the LIC model portfolio, here.