Well informed, well rewarded

PORTFOLIO POINT: Alert investors were well rewarded in 2010 by picking gems in an otherwise lacklustre market.

The past year was not one for sitting on your hands and doing nothing. At the time of publication, the ASX 200 was just two points higher than the same time last year. That’s right: two points.

Sure you would have picked up some dividends along the way but if you really wanted to make money (or even save money) in 2010 you needed to be nimble, you needed to be on top things and, most of all, you needed Eureka Report.

While most of the major investment houses were forecasting the ASX 200 to make gains of 20% or more and hit 5500 by the year’s end, only a few brave souls were prepared to talk the market down. Tim Rocks of Merrill Lynch was one – putting out a brave forecast of 4500 in June – and would have looked pretty darn smart had the index not rallied 200 points from 4600 to 4800 over the past month.

The volatility we experienced this year was a given, but the trick was to stay ahead of the curve and pick the trends as they emerged. Eureka Report’s stable of financial experts not only called the stocks and asset classes that were about to take off, but let you know how to protect the value of your investments and warned you of a great big tax as early as January.

So in the spirit of yearly wrap-ups and an opportunity to give our much-loved contributors a pat on the back, here’s a list of Eureka Report’s top 10 investment ideas in 2010.

Gold

First out of the blocks was Tim Treadgold, who dedicated an entire feature to reasons why Lihir Gold was now on the market (Takeover Target: Lihir). Lihir had been a dog for years and was grappling with the exit of CEO Arthur Hood, shareholder impatience and ordinary returns. But it was when chairman Ross Garnaut uttered the magic words “maximising value” that Tim knew that the company was in play.

Sure enough, Newcrest Mining swooped on the company in April, eventually stumping up $9.5 billion for the troubled gold miner – returning investors who acted on Tim’s hunch 53.43% in just eight months.

Over the course of the year, Tim has written many more articles about gold companies – 15 in total – with an average return of about 60% following gold’s stellar run in 2010, hitting an all-time record of US$1,429.14 on December 7.

The ASX 200 looks toppy at 5000

Readers who took Eureka’s timely advice to take out some insurance on their equity investments in late March early April when the ASX 200 cracked 5000 would have been crowing about it when the market dumped those gains less than month later.

Tom Elliott’s Five easy hedges told readers to sell all or part of profitable holdings; use rigorous stop-loss rules and stick to them; use put options over both individual shares and over the broader market; and offset long positions with shorts.

Robert Gottliebsen, after imploring readers to ensure their allocation to equities was at the lower end of “comfortable”, warned on April 16 that despite the fact the index had crossed 5000 points for the first time since September 2008, people like former BHP Billiton chairman Don Argus was favouring a very liquid strategy for their personal investments and analysts were saying the markets were looking bearish.

He suggested investors look into put options and even CFDs to protect their gains, and sure enough, by May the ASX 200 dropped about 15%.

Under the Radar

While the All Ordinaries lifted a mere 5% in the seven months to December 20 and the Small Ords rose 11%, Michael Feller’s small cap column had an average rate of return of 20% since his column Under the Radar began in June.

Small caps are notoriously volatile, hard to research and will whip the shirt off an uninformed investor’s back in very little time, but of the 13 companies featured, only two ended the period lower, one was flat and 10 provided average to brilliant gains for investors. Ramelius Resources (August 20), Maryborough Sugar Factory (July 23) and Thorn Group (June 25) were the top three and had returns of 96%, 72% and 62% respectively in the months since they were profiled.

While ASG Group (-21%), Nido Petroleum (-18%) and Codan ( 1%) were the bottom three, Feller is quietly confident about their prospects for 2011. Overall, Under the Radar beat the Small Ords by 9% and the All Ords by 16%, a great performance in his first year and a great addition to Eureka Report.

Copper

While Tim Treadgold kept hammering away at gold all year, he broke plenty of news about copper, too, and told Eureka readers to keep an eye on prices this year after mentioning Sandfire Resources and REX Minerals as early as 2009. But even if you were late to the party and only jumped on Sandfire and Rex as recently as August you’d have made 57.95% and 40.29% respectively.

Tim picked the copper upturn when prices hit a bottom for the year in July and said investors interested in getting into the game should look at PanAust, Equinox and OZ Minerals. He’s not quite so keen on OZ now, though its jump from $1.09 at the time of his article to $1.74 on December 23 means it’s given investors a 59.63% gain in the mean time, and later reiterated keeping Sandfire and REX on the watch list.

His analysis was based on under investment in projects, record low stockpiles and the creaky resumption the global economic machine. In his words Australian copper stocks were “perfectly positioned”. At times like these its handy to have an in-house resources expert.

Matrix Engineering

Roger Montgomery’s ValueLine column was a favourite this year. In August he investigated Matrix Engineering, a company that has tripled in value this year and whose shares almost doubled since his article was published.

Montgomery liked the look of the annual report figures from the specialist mining services provider (revenue of $102 million and profits of $18.2 million) and thought that revenue could double over the next 12 months, though profit will depend on the level of increased production from a new $29 million facility in WA and currency movements. He bought them, at $3.42 but valued them at $6.05–9.00. Matrix closed December 23 at $6.33, an increase of 85.09%. Great call, Roger.

Get out of Telstra!

Back in February, when Telstra’s share price was still above $3, Ivor Ries told readers to sell out of the telco. Annual results were dire and trends were working against the company meaning that long-term investors were on a hiding to nothing. New CEO David Thodey’s plans to spruce up the business were unclear and Telstra had to cut prices by up to 20% because customers knew they could buy cheaper elsewhere.

And then there was the National Broadband Network bogey, a deal which was just a hazy spectre at the start of the year and is still a little shaky now. “Realistically, unless he can get the government to pay him at least $9 billion for the network, he’s going to have trouble keeping his shares price above $3,” Ries said. Eventually they settled on $11 billion and Telstra finally sank below $3 on August 20 and hasn’t come up for air since.

And retailers too '¦

Robert Gottliebsen was bang on with his comment about retailers in August: “Holders of retail stock need to watch carefully how their companies are faring in this new environment. Look for signs of weakness, which management will probably blame on the weather or some unforeseen event; but almost certainly the cause of any weakness will be the massive change in the makeup of the retail industry.” (LINK)

Sound familiar? Myer CEO Bernie Brookes and Harvey Norman chief Gerry Harvey are complaining about online sellers’ advantages, while Billabong CEO Derek O’Neill has blamed slow sales on the weather. Myer, Harvey Norman, Billabong and JB Hi-Fi logged a 20.33% loss in share value between them since August 27. Thanks, Robert.

Queensland’s apartment glut

Property prices tumbled along Noosa’s illustrious Hastings Street this year, dropping more than 70% at one brand new luxury development as at the end of November. Luckily, Eureka readers were alerted to the possibility back in May, when Alex Liddington-Cox outlined the perennial problems the area was – and is still – facing. He said obstacles to foreign investment, fewer local investors, excess supply and environmental issues were just the first signs of a pervasive weakness in the market that wasn’t going away anytime soon.

The first beachfront development in a decade – Firstlight – fell apart in November after the parties couldn’t agree on a post-GFC sale price for the site, and at the start of December the RACV acquired the Noosa Sanctuary resort for 70% less than its construction cost, paying $60 million for a complex with 149 apartments that had cost $210 million to build

Don’t be frightened of agribusiness

Put off by the well-publicised failures of agribusiness stocks such as Nufarm, Great Southern and Timbercorp? Fear having your share value chewed up and spat out like stockholders in Elders? Well this year Eureka Report found some gems out that would treat investors gently and provide some comfort for those tentative about the difficult farm sector.

International interest by China Bright Foods and Wilmar International for CSR’s Sucragen sugar arm, and Sumitomo’s attempts to takeover Nufarm eclipsed some deserving small-to-medium cap companies.

In April, Claire Delahunty (LINK) talent-spotted Australian Agricultural Company, AWB, Maryborough Sugar Factory, stock feed company Ridley Corp and salmon farmer Tassal. Since then, AWB has been taken over by Canada’s Agrium, Maryborough Sugar Factory bought out its partner in a profitable joint venture and is currently a hot buy recommendation by many analysts, and Tassal is fielding/fending off a takeover offer from Pacific Equity Partners.

Overall, the return on the five companies since they were profiled on April 23 is 22.95%, with Maryborough Sugar providing the best rate of return at 78.38%.

With commodity prices across the board at record highs and indications that international competition for food suppliers and sources is only going to heat up further in the coming years, this call, back when everyone was distracted by the mineral resources rent tax, was like money in the bank.

Giralia

And once again, back to Tim Treadgold. His last prediction in our list, in no particular order of merit, was when he said in November that miner Giralia Resources was ripe for a takeover.

As confidence returned (despite the threat of the mineral resources rent tax) and miners began to consider acquisitions once more, Treadgold mentioned that a natural deal between Giralia, Atlas Iron and Haomo Mining was a high possibility as the mining sector continued to consolidate.

The three miners own parts of a high-grade iron ore deposit in the Pilbara called Mt Webber. Atlas owns half while Giralia and Haoma own the other half in a 75:25 split.

And on December 21, Atlas and Giralia announced an $828 million friendly cash and scrip deal that values Giralia at $4.47 a share, a 50% premium to the previous day’s close of $2.99.

Giralia chairman Graham Riley said the synergies between the two companies, such as neighbouring deposits and access to port facilities, meant they could increase production and maximise shareholder value.