Investors are priming themselves for the election - and it doesn't matter who wins. In the past few weeks, the S&P/ASX All Ordinaries Index has been bouncing back about 7 per cent, but it is still down about 6.5 per cent from its most recent high in mid-May.
At least part of this run is attributable to the anticipation that a key area of uncertainty will be removed - that of government policy.
"You get a lot more certainty post an election," says Chris Prunty, a portfolio manager with Ausbil Dexia who co-manages its small cap fund. "We've seen evidence that the rules of the game can be changed mid-game, so an election means confidence for the market."
There is much to recommend a strong investment climate of low interest rates and a depreciating Australian dollar for small caps, whose earnings are typically "cyclical" and depend upon spending activity on non-essential items, which occurs once people have paid their bills. But a lack of clarity on government policy due to the major parties being in endless election mode is stopping employers hiring and people spending.
The depressed climate has pulled many share prices back, which has put Prunty's team on the front foot, purchasing stocks that have weakened due to the raft of profit warnings announced in the "confession season" in the two months prior to June 30.
Radar has noticed that even though some of the companies in our research universe have had profit warnings, these stocks have experienced rises in the past few weeks.
Downgrades don't usually produce buying opportunities, but Under the Radar looks for stocks to cover that are very cheap. Hence, even if there is a profit warning that the company won't meet its earnings targets, the shares do not have very far to fall. "Buy cheap and be patient" is our motto. Prunty is in the midst of buying such "cyclical" companies. Those that fit into the "cyclical" category include sectors such as retail, media, tourism and leisure, as well as housing and construction-related stocks.
Specialty Fashion, the owner of Katies and Millers stores, has experienced the highs and lows of the stock market. Its shares are 78¢, but were $1.24 in April, after a first-half profit result that tripled the same period a year earlier. Radar believes its strategy of producing a greater percentage of its own product will continue to improve profitability. Still, if you believe some analysts' forecasts, the stock is trading on a dividend yield for fiscal 2014 of 10 per cent. This stock could use an election bounce, for sure.
Richard Hemming (firstname.lastname@example.org) is an independent analyst who edits a fortnightly newsletter, undertheradarreport.com.au, which provides investment opportunities in small caps you won't get anywhere else.