Extreme sport on the ASX

The markets could move sideways in the months ahead. If you're all cashed up and looking for the right opportunity, rest assured there is absolutely no need to rush into anything. In fact, staying on the sidelines for the time being may be the best option given the market’s current risks.

Ultimately it boils down to what type of investor you are. A few months of ongoing volatility are bound to deliver opportunities for the more speculative investors in the market, with the early stages of what looks like a potentially disappointing results season already generating some spectacular crashes, such as Downer EDI.

Trying to benefit from companies being punished by disappointed fellow investors is likely to become a more popular sport in the short term with highly leveraged investment instruments such as contracts for difference (CFDs) growing market share fast in the Australian retail market.

Another type of investor that is having an absolute ball at the moment is the value seeker. Overall, risk appetite still seems relatively high, but it is receding. As fear has crept in, the US may now become a source of bad news; the market has started to undervalue stocks such as Rinker (RIN). Nobody knows how the US housing market will readjust to the post-boom era. The fact remains that Rinker is widely regarded as a very solid business led by highly regarded and experienced management. Ultimately, it will rise again. For investors with a longer time frame, of two or three years, buying Rinker shares at or below $13 are an absolute bargain. Few experts, if any, will dispute this.

The current average price target as set by the 10 leading domestic sharemarket experts monitored by FN Arena stands at $17.81, which is about 35% above Monday's closing price of $13.23. This probably explains why Rinker shares seem to have revived since late last week. Even at the lowest price target, $15.58 set by ABN-Amro, Rinker shares should still return about 20%, dividends included, over the next 12 months.

But Rinker is far from the only one. As of Monday this week, FN Arena's top 10 stocks of implied total returns in the year ahead is headed by Queensland based travel industry success story S8 (SEL) with an implied total return of more than 50%. Fear of more terrorist attacks hitting the global aviation industry is weighing on market sentiment, as is the fact that the company now bears integration risks following a series of takeovers.

Every broker who covers the stock rates it a buy, and the latest updates indicate they are quite confident the implied value will eventually rise to the surface.

On Monday, analysts at Citigroup Smith Barney again highlighted the huge potential that still resides within the rapidly expanding group: were S8 to increase its back-end commissions by just 1% (commissions paid out when booking volume targets have been exceeded) it would effectively double its pre-tax profit.

However, S8 is a highly speculative buy because the group has some significant branding issues to resolve. On August 9 its Queensland offices were raided by police as part of a wider investigation into commission payments at the group.

Separately, James Hardie (JHX) also offers turnaround potential with all brokers on the FN Arena list rating the shares a buy. Like S8, its implied total return is above 50%.

Others on the list are Macquarie Bank (MBL), Alumina (AWC), Challenger Financial (CGF), Hardman Resources (HDR), Perseverance (PSV) and Oceana Gold (OGD). The lowest recommended of these stocks is New Zealand-oriented Oceana Gold, which is in the midst of a merger that should see it become one of the largest gold producers across the Tasman.

Only two out of the top 10 carry sell ratings and not one single buy: Repco (RCL) and McGuigan Wines (MGW) indicating the reasons why these two stocks are trading so far below intrinsic value are of a much more severe nature. In fact, the risks associated with both opportunities are seen as extremely high (corporate activity excluded), which has caused several negative ratings.

It goes without saying that all of the above will change dramatically if interest rates will have to go higher still and risk pushing the US economy into recession next year. So far, however, only a small minority of experts is willing to support such a view. The coming months should provide investors with more insights on that danger.