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Get 'em while they're not so hot

Savvy investors have plenty of undervalued shares to choose from, writes John Collett.

Savvy investors have plenty of undervalued shares to choose from, writes John Collett.

Sharemarket analysts say some great stocks are screaming to be bought at bargain prices. Shares in BHP Billiton, for example, are trading at prices well below what analysts say are their true worth. For those not fazed by the possibility of further share-price falls, picking up good companies now might be advantageous, before a sustained recovery kicks in.

Analysts expect the wild swings on the Australian sharemarket to continue but believe the market is unlikely to revisit the lows of the global financial crisis of March 2009, when it briefly touched below 3200 points, as measured by the ASX/S&P 200 Index. It could continue to trade sideways at present levels of about 4000 points until European policymakers take strong measures to shore up the European banks exposed to Greece and other Mediterranean countries.

Bargain hunting

Investors need to think long-term and understand the market could fall further, says the head of research at the Australian Stock Report, Geoff Saffer. "But once the dust settles, we would expect to see significantly higher share prices," he says.

"Down the track, this will be seen as one of the best times to have bought into the market."

Miners have been hit hard, with shares sold across the sector. Markets expect lower global economic growth and lower commodity prices. "It's a great opportunity to buy commodities stocks," says the chief executive of Lincoln Indicators, Elio D'Amato.

D'Amato particularly likes Iluka Resources, whose shares are trading about $13 and which he values at $20.72. Iluka mines the "rare earths" essential to many industrial processes and technology such as fuel cells. The company mines mineral sands, from which some of the rare earths are found, in Australia and the US. "It is a great business and we expect strong demand for rare earths to continue," D'Amato says.

Saffer also regards Iluka as a good buy. He has a valuation on its shares of $18.60. Once confidence returns, it is one of the stocks Saffer expects to do well. "Iluka is a world-class player and is in the middle of a production and profit expansion," he says.


D'Amato also likes mining services company Decmil Group - a Western Australia-based design, civil engineering and construction company that services big miners.

"This is a stock we really do like," D'Amato says.

"But it has been sold down like the other mining services companies." Decmil's shares are trading about $1.85 and D'Amato values the shares at $2.79.

For a defensive play, D'Amato likes Hansen Technologies, which supplies the software for advanced payment and billing systems used in the telecommunications and utilities industries.

The company's headquarters are in Melbourne, with offices in New Zealand, the US and Britain.

Hansen's technology is not easy to replicate, D'Amato says. "They take a clip of the ticket whenever anyone pays a bill," he says.

"It has a very defensive earnings profile, with a yield of more than 7 per cent, fully franked."

D'Amato values the stock at $1.15 and it is trading about 80?.

Among the technology stocks, Saffer likes Seek Limited, the internet employment site. Although the employment market in Australia is soft, Seek has a strong balance sheet and highly regarded management that keeps a tight rein on costs, Saffer says.

The company has plenty of opportunities to grow from expansion overseas, he says. The stock is trading about $5 and Saffer has a valuation of $6.90.

Of the financial-sector stocks, Saffer likes QBE Insurance. "There is quite a lot of market risk with QBE at the moment," he says. "QBE, like other insurers, invests widely in overseas markets and any further deterioration in asset prices will affect the company's bottom line.

"However, a lower Australian dollar would increase QBE's overseas earnings."

QBE shares are trading well below their historic price-to-earnings ratio and, at prices of about $13 a share, are on cash yield of more than 10 per cent. Saffer thinks the shares are worth $17.50.

Big miners

The head of equities strategies at Morningstar, Ross Bird, says: "We continue to like BHP Billiton and Rio Tinto, even though in the sort-term their share prices will continue to be volatile." Of the two, Bird prefers BHP, because it is a more diversified company and is slightly lower risk than Rio Tinto. Bird values BHP shares at $59, compared with its share price of about $35.

Bird also likes Orica, which supplies chemicals to the agricultural sector and explosives to mining companies around the world. "It is a blue-chip stock with a good balance sheet," Bird says. Orica shares are trading about $23 and Bird values the shares at $29.95.

For a more defensive play, he suggests Wesfarmers, which has exposure to consumer staples through its ownership of Coles and to the resources sector through its coalmining operations.

"The management is doing a great job with Coles, plus it has that exposure through coal production to Asian markets," he says. Wesfarmers shares are trading about $30 and Bird values them at $36.90.

Beware the value trap

Just because a company's shares are trading cheaply does not make it a good investment. There may be many reasons why the share price has slumped and why it may fall further.

The editor of Sound Money Sound Investments, Greg Canavan, says that despite rallies from time to time, we are in a "pretty nasty" bear market and share prices could go lower. Even stocks that look to be good value now may not look like such good value if their earnings fall. "But bear markets can present very good buying opportunities if you have a time horizon of three or four years," he says.

Like Morningstar's Ross Bird, Canavan says BHP Billiton is a good buy. He values BHP shares at $45. BHP is a highly profitable company that reinvests much of its profits into the company, Canavan says.

Canavan also likes Telstra, but for its defensive role in a portfolio of shares rather than for share price growth. He doesn't see much opportunity for share price growth beyond its present $3. He says the stock is a "buy" for its yield of about 9.5 per cent, fully franked.

Canavan also likes gold miner Silver Lake Resources, whose shares are trading at about $2.50 and which he values at $2.70. Even though gold prices have fallen as investors seek out the even safer haven of US-dollar assets, Canavan remains bullish on gold. Silver Lake Resources is trading on only a small discount to Canavan's valuation.

"Gold is in a bull market as opposed to the general equity market and if you can get gold stocks at any sort of discount it's a good opportunity," he says.

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