Going for growth with StocksInValue

In the growth portfolio, some stocks are ripe for selling … but others remain holds.

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You might remember earlier this year we signalled Eureka Report and ASX-listed Clime Asset Management were planning a new product that would offer stock valuations and research solutions … well, it’s arrived. Today marks the launch of StocksInValue, a service which will assist any investor in understanding the true value of stocks.

The StocksInValue product follows years of research at Eureka Report, where our subscribers told us they wanted a tool to help them carry through investing decisions which constantly arise off the back of our editorial. For sharemarket investors we have always believed that once you know the true value of a stock you can make a fully informed decision on whether it’s right for your portfolio. Our readers can now combine their regular reading of Eureka Report's first class investment commentary with Clime’s proven methodology of evaluating and assessing company value.

To try StocksInValue click here, and watch Alan Kohler discussing the service with Clime Asset Management’s John Abernethy in the video above. And to see the whole process in action, don’t miss John’s piece today on reviewing his share portfolio after a big run-up in the local sharemarket.

James Kirby, Managing Editor

Summary: Strong markets gains over the year to date have pushed some of the stocks in the growth portfolio out of value into profit-taking territory. While short-term price movements are being driven by market noise, and volatility remains, the long-term Australian outlook remains bright.
Key take-out: BHP’s broad spread of operations, but strong exposure to China, has spurred along the miner’s share price. It still attracts as one of the best value stocks on the market.
Key beneficiaries: General investors. Category: Growth.

Last week I reviewed my income portfolio and suggested some changes that I will be making, if the market permits, in coming weeks.

This week I am reviewing the growth portfolio and again reiterate that I am surprised by the performance of this portfolio over the last 12 months. My aim is to achieve a 10% return per annum (from capital gain and dividends). If the portfolio can achieve 10% per annum with reinvestment of dividends, then a 100% return will be achieved over seven years.

In reviewing the portfolio, and using the StocksInValue research tool as a guide, I am once again asking the question: would the stocks currently in the growth portfolio be put in today given the current outlook?

The market has fallen heavily in the past week and while this is tough news for investors, it is consistent with my broader intrinsic valuation of the ASX, which is now approaching ‘value’ based on existing company earnings.

Source: www.stocksinvalue.com.au; May 28, 2013

Today’s environment and outlook

I have commented in the past (Short-term hype needs a long-term eye) that while the short-term outlook is often clouded, the longer term is often much clearer. The short term is clouded by excessive “market noise” or opinions generated by trading entities and brokerage houses. This noise is often made to cause short-term “price movements”. Much of it is myopic, not based on a realistic view of the future and does not attempt to determine long-term value.

At the outset, let me clearly state that the long-term outlook is bright for Australia. I believe that Australia is a dynamic growth economy in a dynamic, growing part of the world. However, I am dismayed to observe that we are poorly served by the leaders on both sides of politics. Neither side presents a vision or a way to transform our potential into a national growth plan. Both sides are incredibly reactive to events and often well after those events have transpired.

Our politicians and their advisors have maintained a religious zeal for a policy of “free trade”. This noble policy requires that all our trading partners have the same zeal for free trade. They do not and this is clearly shown through their policies of manipulating currencies.

Current growth portfolio view

Below is a short investment overview of each security at current market prices.

BHP Limited (BHP)

Current Valuation $40 – 2014 Valuation $45

BHP has been a wonderful performer over the last five years with the tail wind of China, but against the headwinds of Europe and Japan. I anticipate continued growth in export volumes in iron ore, copper and oil. The growth in gas production out of the US seems assured. Recovery in Japan seems possible. A weakening $A certainly supports my valuation. On the negative side is the assumption of a sustainable selling price of commodities in the current volatile world. In the main BHP attracts as one of the best value stocks on the market. I am a strong holder in the portfolio.

The market has historically tracked fairly closely to intrinsic value for BHP. At today’s price it appears to have been sold down too heavily – creating an investment opportunity.

Source: www.stocksinvalue.com.au

Commonwealth Bank (CBA)

Current Valuation $65 – 2014 Valuation $67

CBA is Australia’s best-performing bank based on financial performance exhibited by return on equity. While the recent update suggested continued earnings growth in the March quarter, it did suggest that earnings growth based on credit growth remains difficult. I regard CBA as a premier bank that trades at a very full price. So if it rallies again to about $72, without any new information, I will sell it out of the portfolio.

Westpac Bank (WBC)

Current Valuation $30 – 2014 valuation $31

WBC has recently fallen back into value, and so it is an attractive hold at current market prices. Readers should be aware that the outlook for banks remains challenging given low credit growth in a slowing economy. Indeed, recent earnings growth across the bank sector has been generated from cost cutting (good) and provision adjustments (not sustainable). Value growth looking forward is not dynamic but dividends enhance this pedestrian return.

Source: www.stocksinvalue.com.au

Woolworths (WOW)

Current Valuation $31.30 – 2014 Valuation $34.30

WOW remains a solid and predictable profit generator from its traditional grocery business. The significant retail market shares and direct leverage to a growing population make it an ideal long-term investment. The rollout of the Masters Hardware chain continues to be a headwind, but it is being expensed. When, and if, profit appears from this investment then a lift in value will appear. The recent fall in price has brought it just below my estimate of future value in 2014.

Iress (IRE)

Current Valuation $6.85 – 2014 Valuation $6.90

IRE was bought at an attractive price into my portfolio, but the substantial lift in its market price does not appear to be justified by its earnings or mid-term outlook. It remains a high-quality business in Australia that is leveraged to recovery in financial markets. However, offshore profit growth has not been forthcoming and indeed losses in the UK market may be magnified by a weakening currency. I will be taking IRE out of the portfolio at about $8.50 in coming weeks.

Source: www.stocksinvalue.com.au

Reject Shop (TRS)

Current Valuation $15.20 – 2014 Valuation $16.80

The recent capital raising of TRS has certainly made the balance sheet rock solid and secured a financial platform for future growth. Indeed, the rollout of stores will be accelerated and so earnings and value will lift appreciably over coming years. The current price is quite full but certainly not excessive, and so I am happy to hold.

Source: www.stocksinvalue.com.au

Brickworks (BKW)

Current Valuation $12.18 – 2014 Valuation $12.45

With housing starts grinding upwards and a range of industry rationalisation opportunities being presented, BKW attracts as a solid growth opportunity. A development land bank adds to the appeal, as does the potential for increased dividends across the Soul Pattinson Group emanating from a cashed-up New Hope. The asset backing per share appears well above the current share price. 

MacMillan Shakespeare (MMS)

Current Valuation $16.20 – 2014 Valuation $18.50

MMS maintains an excellent growth profile, with a range of NSW health contracts coming up for tender in the salary packaging arena. Last year’s South Australian government “monopoly” contract win showed how strong the MMS offer is. Group cash flow remains excellent, as does return on equity. The current share price is well below the 2014 forecast value.

Source: www.stocksinvalue.com.au

Mineral Resources (MIN)

Current Valuation $12.70 – 2014 Valuation $14

MIN’s share price has fallen well into value. I note that the iron ore crushing side of the MIN business is supported by substantial long-term contracts. The iron ore mining division sells on spot markets and remains profitable at iron ore prices above $US100 per tonne. Mining services industry companies are currently oversold, with sentiment being excessively bearish. MIN is at the quality end of this sector and screens as one of the best value opportunities in the market.

On a reduced forecast normalised return on equity of 25%, and after calculating for additional risk to market (required return of 14%), the company still has an intrinsic value approximately 33% above its market price.

Source: www.stocksinvalue.com.au

Rio Tinto (RIO)

December 2013 Value $67

RIO has been hammered in the market due to its high iron ore exposure. While it does not offer the diversity of BHP, it does attract at current prices. It is a direct beneficiary of the weakening $A, which in turn is offsetting the projected declines in iron ore prices. I mentioned a few weeks ago that I missed an opportunity to exit when it was above $70. Today it is solid hold.

Flight Centre (FLT)

Current Valuation $34.20 – 2014 Valuation $38.15

FLT was acquired just before Christmas when it was offered at reasonable value in the market at $27. The share price rise since then (to over $40) had been extraordinary before the recent sharp correction. In FLT’s case this correction was well justified, with price value lifting well above 2014 value. I am not convinced that a falling $A will not create headwinds for this company, and so based on current information I intend to sell my position should the price revisit $40 in coming weeks.


John Abernethy is the chief investment officer for Clime Asset Management. The insights and valuations made by John and his funds management team power an online stock valuation platform: StocksInValue (www.stocksinvalue.com.au).

Eureka members can access a 14-day free trial (click here) and are entitled to special discounts if they choose to subscribe.

Clime Growth Portfolio Statistics

Return since June 30, 2012: 32.74%

Returns since Inception (April 19, 2012): 24.25%

Average Yield: 5.72%

Start Value: $111,580.24

Current Value: $148,109.54

Dividends accrued since December 31, 2012: $3,842.64

Clime Growth Portfolio - Prices as at close on 28th May 2013

CompanyCodePurchase
 Price
 Market
Price 
FY13 (f)
GU Yield
FY13
Value
Safety
Margin
BHP BillitonBHP $31.65 $33.984.83% $40.3516.65%
Commonwealth BankCBA $53.38 $68.607.63% $65.05-4.00%
WestpacWBC $21.29 $29.479.07% $30.063.69%
WoolworthsWOW $26.88 $32.905.79% $31.32-4.57%
IressIRE $6.60 $8.185.72% $6.85-16.31%
The Reject ShopTRS $9.33 $16.523.39% $15.18-10.07%
BrickworksBKW $10.15 $12.244.79% $12.18-0.49%
McMillan ShakespeareMMS $11.88 $16.204.53% $16.20-1.22%
Mineral ResourcesMIN $8.98 $8.797.87% $12.7643.37%
Rio TintoRIO $56.86 $52.884.64% $67.1623.37%
Flight CentreFLT $27.00 $38.424.64% $34.23-13.89%

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