Christmas trimmings: introducing the nifty 50/50 - part 2

In part one of this series, we introduced the 50/50 stock coverage approach that we will move toward in 2011. That meant letting go of numerous stocks that weren’t interesting or offering value to make way for new ideas that will have an impact on your portfolio.

We would revisit many of the stocks that we ceased coverage on in part one if a buying opportunity presented itself. But as you are about to see, the second list contains a larger number of companies that will be thrown on the scrap heap for good.

PaperlinX (PPX): More than five years ago, we said ‘If you could invest the entire wealth of your worst enemy, and got to lock his or her money up in one stock for the next decade, PaperlinX would have to be high on your list for consideration.’ A decade hasn’t yet passed, but the market has sharply come around to our way of thinking, marking PaperlinX’s stock down 87% since mid-2005. At today’s price, it’s getting closer to becoming a value play. But we’re not comfortable enough to recommend the stock, despite having a drastically reduced (but still significant) debt load. We may reconsider at some stage, but we’re CEASING COVERAGE today.

Sims Metal Management (SGM): In the review Steel sector part 2: Sims Metal Management, we highlighted why this metals and electronics recycler is a better business than either BlueScope or OneSteel. But, as Charlie Munger likes to point out, a horse that can count to ten is an amazing horse, not an amazing mathematician. Sims stock trades at more than twice net tangible assets, and a 25% premium to book value, a figure which already incorporates more than $1bn of goodwill. We’re not convinced it deserves the premium. CEASING COVERAGE.

Willmott PINES (WFLPA): We became uncomfortable with this preference share around the time that other managed investment scheme (MIS) operators—including Timbercorp and Great Southern—were going to the wall. We bit the bullet and sold out for a loss in mid-2009. Willmott Forests has since gone into receivership. With everyone who followed our recommendation long out of the securities, we’re moving to CEASE COVERAGE.

Select Harvests (SHV): This almond company appeared to have a cosy and lucrative future developing and managing almond orchards for MIS investors on Timbercorp’s behalf. Then its world came crashing down when the government banned upfront tax deductibility of almond MIS projects, followed by Timbercorp’s administration. Select Harvests then missed a golden opportunity to cheaply purchase those almond plantations it already managed though the administration process. For now, it continues to manage these plantations on behalf of the new corporate owner, Olam. But this will not be a particularly lucrative endeavour, for reasons we highlighted in Time to exit Select Harvests of 14 Jan 10 (Sell – $4.45) before the market cottoned-on to the changing economics of the business. Now, Select is trying to grow its orchard base, by developing new orchards in Western Australian and buying others elsewhere. This is a much tougher ballgame. For now, we’re not interested in playing. CEASING COVERAGE.

Alinta Energy Group (AEJ): We avoided Alinta Group for years before it got acquired by Babcock & Brown Power. We looked at that entity once in early 2008 and, fortunately, avoided the stock (see Debt worries hit B&B Power of 29 Apr 08). The subsequent demise, and renaming to Alinta Energy Group, actually made it an interesting punt at one stage. The Intelligent Investor Value Fund bought some shares at 5 cents, and made a further arbitrage investment after its restructuring and delisting proposal was announced, as highlighted in the Bristlemouth blog piece Alinta Energy Makes It Two From Two. But the situation is too small and illiquid for our publication, and we’re moving to CEASE COVERAGE.

Prime Infrastructure (PIH): This infrastructure owner got taken over at what we consider a full and fair price. Investors now either own a pile of cash, or shares in Brookfield Infrastructure Partners which, as an international stock, we’re unable to continue covering. The only outstanding matter is the so-called AET&D option, but this is only relevant to former owners of BBI EPS securities that saw their holding converted in to Prime Infrastructure securities, rather than anyone who bought PIH through the public offer in November 2009 or subsequently. As more information on any capital return from the sale of AET&D assets comes to light, we’ll keep you up to date. But, as far as Prime Infrastructure is concerned, it’s time to CEASE COVERAGE.

Corporate Express (CXP): We don’t like to see great companies disappear from the ASX, as it shrinks our universe of potential future investment opportunities. And we really hate it when a great stock gets taken from us at a too-cheap price. Unfortunately, bidder Staples Inc. was able to convince the bulk of Corporate Express shareholders that its offer was a fair one. So, despite our protestations, we had no choice but the sell. That makes CEASING COVERAGE a fait accompli.

Miclyn Express Offshore (MIO): We covered this stock because it was a popular and heavily pushed float that many of you wanted our thoughts on. We didn’t like the stock, covered in Is Macquarie taking the Miclyn? of 18 Mar 10. The share price has sunk 8% since the float but, for now, we’re not interested. CEASING COVERAGE.

Kathmandu Holdings (KMD): Despite the well-orchestrated PR campaign around this float in late 2009, it was a fairly easy one for seasoned float-watchers to avoid. Be very careful about buying from private equity sellers, as we highlighted in Kathmandu or Kathmandon’t. With the stock down 24% since the float, it’s headed in the right direction. But we’re not convinced it’s cheap enough yet. CEASING COVERAGE.

CBA PERLS V (CBAPA): This 2009 offer had more going for it than most income securities issued over the 2004-2007 period. But there was still plenty of fine print which could go against owners. For all the reasons why we didn’t recommend the float, we’re now CEASING COVERAGE.

ANZ CPS 2 (ANZPA): The fine print in this offer was much like the same-generation CBA PERLS V offer. The yield wasn’t high enough to compensate and, with the stock trading at a small premium to its face value, we’re CEASING COVERAGE.

Westpac SPS II (WBCPB): Too much fine print, too much risk, too little return. At a premium to face value, we’re not interested. CEASING COVERAGE.

Ten Network Holdings Limted (TEN): Billionaires and sons of media moguls have come to dominate Ten’s share register in recent times. But as we recently discussed in Ten: Switching off on 24 Nov 10 (Better Value Elsewhere – $1.595), the economics of the industry are less favourable than in the past. The rise of alternative mediums, such as IPTV, means consumers have greater choice, as do advertisers who provide TV with their revenue. Compounding this reality, changes to Australia’s anti-siphoning laws mean pay TV can now bid for lucrative sporting content. Ten remains the pick of the TV sector, but the unattractive valuation means we are CEASING COVERAGE.

Austar (AUN):The changing TV landscape does not bode well for Austar, either, as we recently discussed in Pay TV: All about the content on 28 Oct 10 (Sell – $0.99). In an environment where there are increasing choices of platforms to view content, aggregators and distributors such as Austar face a difficult future. Already much of the benefit flows through to content providers and, with hefty subscriber set up costs, there’s not much left over for shareholders. At the current share price the market is overvaluing Austar’s subscribers and we are CEASING COVERAGE.

McPherson’s (MCP): Consumer products company McPherson’s has been one of our poorer recommendations. Its high debt levels meant it suffered during the global financial crisis, yet it somehow managed to avoid a highly dilutive capital raising. We managed to sell out at the worst possible time on 3 Feb 09 (Sell – $0.44) and haven’t followed the company since. Debt levels are still somewhat higher than we are comfortable with and we’re CEASING COVERAGE.

Mortgage Choice (MOC): We’ve not followed mortgage broker Mortgage Choice closely since downgrading to Sell in Mortgage Choice makes an exit on 5 Jun 09 (Sell – $0.92). There’s little evidence the big four banks are squeezing mortgage broking commissions any further, but our general concerns about the housing market mean we remain worried about the business model (which is tied to housing turnover). CEASING COVERAGE.

Platinum Capital (PMC): Platinum Capital is Platinum Asset Management’s listed investment company, but it rarely trades at a reasonable price. We last mentioned the company in Platinum’s call for cash on 11 Jan 10 (Hold - $1.68). With the stock trading at a 19% premium to its net tangible assets per share (NTA) of $1.26, we’re CEASING COVERAGE until we get the opportunity to buy it closer to NTA. If you are looking for listed exposure to international sharemarkets, we prefer Magellan Flagship Fund and Templeton Global Growth (Platinum’s unlisted managed funds might also be suitable).

Premier Investments (PMV): Premier Investments owns youth-oriented retail brands such as Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti, as well as a 26% stake in listed small appliances company Breville Group. We’ve never officially recommended Premier, having only reviewed the company once on 11 Aug 08 (Hold – $6.18) following its takeover of Just Group. Our preferred retail stocks are Woolworths and Harvey Norman although we would be interested in Premier at the right price. We’ll take another look below $5.00 but, until then, we’re CEASING COVERAGE.

Premium Investors (PRV): We recommended members sell two-thirds of their holding in this listed investment company into the company’s buyback on 24 Sep 09 (Sell – $0.80). We’re equally happy with members selling or retaining any remaining holding depending on their objectives (those seeking yield and diversification might choose to retain it). But as Premium Investors is unlikely to ever be a ‘best idea’ we’d prefer to devote analytical resources to stocks with more upside. CEASING COVERAGE.

QR National (QRN): We recommended you steer clear of the recent QR National float in QR National off the rails on 13 Oct 10 (Avoid – $2.80) and, despite the stag profit, that remains our view. We doubt this capital-hungry company is likely to be a strong performer over the long term. CEASING COVERAGE.

Toll Holdings (TOL): We’ve been growing increasingly uncomfortable with transport group Toll’s world-conquering strategy, as we said in Toll’s Little problem on 31 May 10 (Hold – $6.25). And it’s unlikely the company will hire a new chief executive who will reverse Paul Little’s strategy when he steps down in 2012. As we indicated in our last update, on 30 Aug 10 (Hold – $6.15), we’d take another look closer to $4.00. But, until then, we’re CEASING COVERAGE.

Transfield Services (TSE): We looked at engineering and contracting company Transfield Services in Cage match: UGL vs Transfield on 28 Sep 10 (Avoid – $3.69). Transfield came out of the match the more battered of the two, and the company’s recent acquisition of Easternwell—accompanied by yet another capital raising—suggests the company hasn’t learned the lessons of the downturn. Or perhaps Transfield is buying Easternwell as a ‘poison pill’ to deter a potential takeover offer. Whatever the reason, we’re CEASING COVERAGE.

UGL (UGL): While UGL stayed the distance in Cage Match: UGL vs Transfield on 28 Sep 10 (Avoid – $3.69), our main concern is price. The company’s reasonable management and low-ish gearing are reassuring, but margins in this industry are low. We’d need a decent margin of safety before buying, and would only take another look if the stock fell below $11.00. Until then, we’re CEASING COVERAGE.