Sleepless in Salamanca

Last week was an interesting time to be a holder of geared BHP Billiton and Rio Tinto shares. They both temporarily sank to levels that I do not think many people expected. I certainly did not expect BHP to dip into the high-$24s or Rio to dip briefly into the high-$60s, and so I found myself in front of the computer at 3am Spanish time facing the distinct possibility of a margin call.

Playing chicken with a margin call involves making sure your margin loan stays in buffer without it slipping into margin call (where, because the stocks have fallen, the amount lent exceeds the maximum loan-to-valuation ratio). This requires you to stay cool and ready to sell some shares or add credit to your trading account to prevent a margin call.

Thankfully, I didn’t face a margin call and the two stocks have started to trend upwards again.

In the previous two corrections I’ve held my BHP shares and bought in the correction, which worked extremely well. It was a reasonable expectation that the strategy would work again during this correction. After all, on its fundamentals BHP is not overpriced.

However, I did not take into account two important factors:

• First, the relative size of my BHP shareholding. I held more BHP shares than I had on the previous occasions so its share price fall had a bigger impact on my portfolio.

• Second, before the correction started there were warnings about the fear of inflation and how the resulting fear and paranoia would eventually befall the markets around the world. I should have paid more attention to them.

Reflecting on this most recent correction I could have sold above $30. Having said that, it would certainly have been wrong thing for me to sell my BHP shares at anything below $28, and certainly to panic-sell them at $25. I’m sure there are plenty of “punters” and a few professionals out there who did and Don Argus, BHP’s chairman, was very happy to spend a cool million dollars to buy those shares for about $26 a pop. (See Wednesday’s report, Backing Their Own Ability.)

Now I also want to buy some cheap post-correction stocks. So less than a week after my brush with a margin call, I asked to extend my margin loan. It seems my lender saw some method in my madness (or just wanted the 8.4% interest) because my request was granted. So out came the shopping list.

It includes BHP and Rio, of course, but also ABC Learning, which is enduring a very sharp reversal , Pro Medicus, my micro-cap of choice, and Multiplex, which is in recovery mode. Also on the list was Anvil Mining, which with a price/earnings (P/)E multiple of 2, unhedged copper exposure and no debt would have to be the world’s cheapest copper stock. The Commonwealth Bank seems to think so '” it recently bought 10% of the company.

I bought some Pro Medicus, a stock I’ve been keen on for a year. It is a world-leader is the digitisation of medical X-ray images, which can then be stored on a computer instead of plastic film. Surprisingly, it’s a technology that is still in its infancy and Pro Medicus has a dominant position with its technology in Australia, a deal with Agfa to sell its technology into North America, and is also starting to expand into Europe. With a P/E of about 19 it seems expensive, but it also has no debt and a lazy $10-plus million sitting in the bank that it wants to return to shareholders in the second half of this year.

I sold my previous Pro Medicus holding at the start of the May correction. Thankfully, I was able to buy them back again at a minor discount to my original sale price

And in keeping with my bullish position on resources, I decided to take a ride on the wild side with Zinifex. It is on a P/E of 6 and is generating plenty of cash, but it’s extremely volatile. In fact, its price graph almost exactly mirrors the price graph of zinc, which looks like one side of Mount Fuji followed by the peaks and troughs of Zinifex’s shareholder’s over-stressed hearts.

I bought Zinifex with its volatility and the general market volatility in mind. It is a good traders’ environment and Zinifex has been jumping around at up to 10% per day, which might be an opportunity to trade successfully '” that is, the next time it jumps 10% I’m out.