How did we do - the good, the bad and plain ugly

Feeling kind of blue

Australian investors have traditionally concentrated their funds on large, well-established companies in the top 100. It is no surprise therefore to note that while the All Ordinaries Index (276 stocks) has risen 10.4% during 1999, the Top 100 Index was up 10.2%. These blue chips are essential to the health of any investor's portfolio, and we cover around 40 of them in our 'Blue Chip Industrials' section.

Seven of the 40 showed returns of greater than 30%, including Pioneer, Fairfax, C&W Optus, News Corporation, Macquarie Bank, PBL and CSL, all of whom have been reviewed favourably since January. Our defensive portfolio (stocks selected for dividends and growth) also came in handy. Last covered in issue 41, it has returned 11.0%, not bad for a group of stocks selected to insulate investors against an economic slowdown.

Two stocks have given us a hard time though. Mayne Nickless was troubled by the poor prospects of its private hospitals and, despite our accumulate recommendation has dropped 35% since the start of the year. Qantas enjoyed a 59% rise between New Year's Day and late August in spite of our being consistently negative on the stock, although more recent events may justify our view. (This year's rise is now only 18.3%)

This illustrates two important lessons. The first is that Blue Chips can fall from favour from time to time and this can create good buying opportunities (see BHP below). The second is the importance of having a diversified portfolio to protect you against unforeseen problems with a particular company or sector.

The big miners excel

During 1999 the All Mining Index rose about 20.5%, a result of the general recovery in metal prices. Here, we cover 33 companies and kept subscribers holding on to their stock for the turnaround, although Resolute, amongst others let us down (see page 8). Two of the biggest resources companies we got right though. BHP was rated as a long term buy in late '98 at $11.98 and is now trading around $17.84. Their competitor, Rio Tinto was recommended as an accumulate in issue 24 and has risen by 45% since then.

The so-called 'second liners', those stocks which don't lead the market in terms of size and reputation, have been big performers this year as we suggested they would in our Spotting Value and Picking Winners report, published in January this year. The 87 second line stocks that we regularly cover enjoyed an average gain of 21.6%.

Here we managed to capture a number of notable winners with Energy Developments and Computershare being our best picks, both rising by close to 300%. Generally, the companies which had a good growth 'story' to tell, combined with a strong element of technology in their business plan performed well. Flight Centre (up 199%), Candle (up 66%), Harvey Norman (up 17%) and Brazin (up 22%) were all notable successes.

But not all the stories were credible. For instance, we saw Cinema Plus in issue 31 as more of a fad than a viable business and by issue 36, with the stock at 81 cents, had come around to a sell position. The shares have since gone to 51 cents, emphasising the importance of picking the right stocks in this part of the market.

Spinning the wheel

In each issue we devote a page to companies yet to establish themselves, often technology-type companies (called High Stakes - Ed). As you'd expect, there have been some big winners with the average return of our High Stakes companies a massive 220%. That's because SecureNet started the year (before we covered the stock) at 25 cents and has made it to $7.90. Did we catch this one? No. When we introduced these shares in issue 31, they had reached $1.44. We noted the high valuation at that price and suggested taking part profits.

We did, however, foresee a good run in the share price of accounting software developer Solution 6, recommending it as a speculative buy at $3.50 in issue 32 and suggesting taking part profits nine issues later at $7.25. We captured Keycorp at $2.52 in issue 27 too and felt taking part profits was a wise course of action at $7.60 in issue 40. Sometimes, though, our timing is wrong. We recommended Reinsurance Australia as a good counter-cyclical bet on the reinsurance industry at $1.02 in issue 36 but with hurricanes and earthquakes, it's now closer to 69 cents. That's why we call this section High Stakes.

Diversification

With the market performing so strongly, even the most incompetent can point to some good picks, although few can point to companies like One.Tel, as we did (a speculative buy at 25 cents in issue 7). Understand, though, that you can't expect to beat the market every year, although you can insulate yourself against future bear markets by having a properly diversified portfolio suited to your investment needs, not somebody else's. A selection of defensive stocks will always pay off in this regard.

Above all, have a long-term perspective and don't get carried away by the recent technology floats - the original reason people invested in stocks was to receive an income stream in the form of dividends. At some stage, these companies will need to earn a profit and at the moment, many are just business plans. Please be cautious. Here's wishing you a prosperous 2000.