TRADING ROOM

The much maligned medical centre and pathology group Primary Health Care has had a 15 per cent fall in its shares since November. In the same period, the Australia Health Care Index has been a star performer, recording a gain of 15 per cent.

This 30 per cent underperformance can be attributed to several factors including low earnings growth, a lack of overseas exposure and a discount for management.

In recent weeks though, sentiment towards the stock has started to turn. The share price has climbed 5 per cent, breaking a long downward trend. In recent years, Primary has spent heavily on acquisitions and expanding its medical centre business. This has resulted in the return on equity dropping to about 5 per cent, meaning the company does not earn its cost of capital. Not a great result for shareholders.

There is a good chance Primary is now reducing its capital spending, which could help improve returns. Additionally, the medical centre business, the main driver of profits, seems to be enjoying better trading conditions. If the company can produce cash, pay down its debt and extract some earnings growth, the price-earnings ratio could expand 2 points from the current level of about 11 times earnings. This could cause the share price to climb to about $3.40.

GOOD AS GOLD

I am not a gold bug. Buying gold stocks is difficult because the underlying asset price does not depend on supply and demand. This does not mean you cannot make money out of the precious metal as evidenced by the 12-year bull run that has seen the price of bullion rise about 500 per cent.

Since August though, the bullion price has struggled, falling from a high of $US1900 an ounce to about $US1600 an ounce at present. Interestingly, this has been an orderly decline and a highly unusual way to end a multi-year boom. Most bull market tops are characterised by volatility and then a price decline. This alone suggests there may be life yet in the gold market - a very mature market.

On May 15, the price of bullion sunk to a low of US$1526 an ounce but has risen about $US100 an ounce. Could this be the beginning of the next big leg up in gold? This is very difficult to work out at this stage. However, if central banks around the world decide to give everyone a shot of extra liquidity, gold may just work its way higher, towards the inevitable end of a giant bull market.

What is even more intriguing is the fact gold bullion prices peaked well before share prices in gold companies.Shares of gold companies around the world are trading at their cheapest level in decades, compared with bullion prices. Investors interested in gold should ideally look back at gold stocks rather than bullion itself.

Additionally, if the Australian dollar falls against the US dollar, the attractiveness of local gold stocks rises. The scenario of gold moving up and the Australian dollar moving down, though, is rare, and you should not hold your breath.

RESILIENT REJECT

It is hardly news that traditional shop-front retail businesses are struggling at the moment. The shy consumer and the onslaught of the internet have crippled top line growth.

The Reject Shop discount variety chain should be resilient to these trends. The company concentrates on low-priced goods that are not easy targets for online retailers. These defensive qualities though have not stopped the group's share price falling 28 per cent since mid-March compared with a 4 per cent fall in the benchmark All Ordinaries Index.

Analysts covering the stock have been winding back their earnings per share forecasts following a deteriorating environment and a sagging Australian dollar. Adding to the company's woes is the stellar performance in recent times of the Wesfarmers group's Kmart, which competes with The Reject Shop in many areas.

The company is yet to comment, but at current levels it is trading at a price-earnings ratio of 11 times 2012-13 earnings. It is never wise to buy a company's shares if analysts are downgrading earnings, because no one is quite sure when that trend will end. However, The Reject Shop, with its defensive qualities, has a lot to offer prospective shareholders.

The company still has a big store roll-out program to implement over the next five years that should drive earnings. A retailer in this position can trade at a much higher P/Eratio. The store roll-out should be supportive as long as the management is able to buy quality stock and improve inventory turns.

It is worth watching this company for the commentary at the next result and gauging if the outlook is healthy despite soft current earnings.

The Sydney Morning Herald does not take responsibility for any stock tips. Readers should contact a licensed financial advisor.