The confessional (surprise) edition
The sharemarket is constantly setting traps for the unwary. This year many have found their portfolios ensnared by falling iron ore and coal prices, the abandonment of policies designed to tackle global warming and a slow retreat from the rush to yield, which has seen bank stocks and other staples fall away.
Share Advisor members have largely avoided these pitfalls, with Gaurav Sodhi's shirt saving warnings about the dangers in iron ore stocks worthy of special mention [as does the arrival of his new baby, Rohan].
Over four years ago Gaurav presciently wrote that 'it is a rare and happy industry that can boast both record production and record prices. We believe that the new supply miners are boasting of will ultimately be the undoing of the great iron ore boom.'
Key Points
- Strong recommendations performance for the year
- Additional analytical resources allocated to high quality businesses
- On the verge of some exciting improvements
In that review alone six stocks were listed as Avoids. Two are down by more than 90% and the company least affected, Fortescue Metals, is down a mere 60%. Looks like it wasn't different this time after all.
Mining services opportunity
We've had less success with the basket of stocks recommended in Time to buy mining services? Part 3 on 26 May 14. Two have almost halved and only one – Bradken – is above the price we recommended it as a Speculative Buy. More work is being done on these stocks after such price falls, specifically in the area of contract valuation.
Without wishing to preempt it, this is an interesting area of opportunity but requires a mini-portfolio slant. Given the nature of these businesses, a sector approach, as applied in gold and oil stocks, makes more sense than a stock-based view.
Other stocks have also disappointed, at least in the short term. Ainsworth has got off to a shocker, falling almost 20% since publishing our initial research on 6 Nov 14 (Buy – $3.03). Long standing buy recommendation Woolworths has fallen 6.6% since the beginning of the year and The Reject Shop is down 23.7% from the date of our initial recommendation on 1 Apr 14 (Buy – $9.89).
As I was once told, such are the 'swings and roundabouts of outrageous fortune'. In any given year not all purchases will go quite as one might hope. That does not mean things will end badly, or, for that matter, well. As ever, it's all about price and value.
Offsetting the disappointments are a slew of recommendations that have come good this year, as Table 1 shows.
Company (ASX code) | Original Buy recommendation* | Sell/Downgrade recommendation** | Share price at 21 Nov 14 | Percentage change*** |
---|---|---|---|---|
Sirtex Medical (SRX) | 8 Nov 10 (Speculative Buy – $5.90) | 2 Sep 14 (Hold – $22.30) | $26.10 | 342 |
CSL (CSL) | 18 Mar 11 (Long Term Buy – $33.97) | 28 Mar 12 (Hold – $35.13) | $78.60 | 131 |
ARB Corp (ARP) | 8 Aug 11 (Long Term Buy – $7.01) | 21 May 13 (Sell – $13.49) | $11.26 | 92 |
Fisher & Paykel Healthcare (FPH) | 11 May 11 (Long Term Buy – $2.19) | 30 Jan 14 (Sell – $3.71) | $5.18 | 69 |
Acrux (ACR) | 13 Jun 14 (Speculative Buy – $0.80) | 19 Sep 14 (Sell – $1.35) | $1.28 | 69 |
Caltex (CTX) | 22 Oct 13 (Buy – $18.68) | 11 Mar 14 (Hold – $21.62) | $30.89 | 65 |
Echo Entertainment (EGP) | 23 Sep 13 (Buy – $2.68) | 7 Nov 14 (Sell – $4.02) | $3.80 | 50 |
Amalgamated Holdings (AHD) | 22 Feb 13 (Long Term Buy – $7.76) | 9 Jul 13 (Hold – $8.38) | $11.08 | 43 |
M2 (MTU) | 18 Oct 13 (Buy – $6.02) | 26 Aug 14 (Hold – $7.11) | $8.50 | 41 |
ResMed (RMD) | 25 Jan 13 (Long Term Buy – $4.52) | NA – Still on Buy List | $6.02 | 33 |
Cochlear (COH) | 12 Feb 14 (Buy – $54.64) | 26 Feb 14 (Hold – $58.75 | $69.44 | 27 |
Hotel Prop. Investments (HPI) | 5 Mar 14 (Buy – $1.995) | 22 Oct 14 (Hold – $2.34) | $2.36 | 18 |
* The Buy recommendation listed shows the first instance of what might have been a series of Buys prior to a price rise. | ||||
** Where we have suggested you sell, the first instance of that recommendation is listed. Where we have not, the first change in recommendation is shown. | ||||
*** Where the recommendation is still active (i.e. not been sold), percentage return using closing prices on 21/11/14 has been used. When recommendation has been sold, the price at the time of the initial Sell recommendation has been used. |
Even better, we've been delighted to add a few new names to our Buy list, including Austbrokers, Fleetwood, Virtus Health and the return of Computershare. Standing at 30 stocks, the list is longer than it has been for two reasons. Firstly, the market has produced more opportunities recently. And secondly, because we've spent less time on things like podcasts, we've got greater resources to investigate them.
Model portfolio performance
The performance of our model income and growth portfolios this year suggests we've done a reasonable job, too. Whilst the All Ords Accumulation index (including dividends) is up 4.6% this year (1 Jan 14 to 18 Nov 14), the model income portfolio has risen by 10.4% and the growth portfolio an impressive 12.5%.
So far so good then? Not quite. This being a 'confessional' let's examine what hasn't gone so well.
The first may be a minor misdemeanor but one that peppers Intelligent Investor history. Having picked out some cheap stocks we've tended to sell too early. Fisher & Paykel Healthcare listed in the table is a good recent example, Aristocrat another.
Whilst this doesn't 'cost' money, it does mean you don't make as much from some of our recommendations as you could. The long term performance of stocks like CSL and ARB Corp suggests that if you can buy them cheaply, sometimes it's simply better to hang on. The difficulty is in assessing exactly how strong the franchise is to make that distinction.
A greater mistake, and again one of omission rather than commission, is of a similar ilk. Picking out a Domino's Pizza or REA Group before the huge rise in price can make up for a lot of mistakes elsewhere. These are the kinds of franchises that continually outperform even the high expectations built into their share prices.
Such high quality businesses are frequently multi-bagger opportunities and we don't want to miss out on them. Investing becomes a great deal easier when you can find one of these opportunities instead of having to find 5-10 other ideas to produce the same return. That's why Jonathan Mills has been recruited to replace Jason Prowd, who has stepped up to Chief Operating Officer, to find and conduct in-depth research into the Seeks and REAs of the future.
It's also the reason why we've got former research director Greg Hoffman and former analyst James Greenhalgh regularly contributing. With this enhanced capacity we're excited about finding a whole new crop of buy ideas next year, especially if markets become more volatile.
International investing under-exposure
A few other points worth mentioning; it's been more than two years since the publication of Ripe for the picking: overseas stocks to buy now. Now almost everyone is getting on the international investing bandwagon.
The stocks listed in that report have performed well but despite that and the lower Australian dollar, it's not too late to get overseas exposure built into your portfolio.
Australians have about 1% of their SMSFs invested overseas, a crazily small number given the problems the Aussie economy faces. We're going to announce our very own contribution to that quest very soon but for now, we've been sworn to secrecy.
What we can tell you is that next year we'll be producing more special reports on buy ideas. That will mean slightly less weekly content on the website but believe that's a small price to pay for more and better buy ideas.
Over the next four weeks you'll also notice that our regular content will slow. Share Advisor is on the cusp of announcing distinct improvements to our service and we need to prepare for them. These have been a long time coming and we hope you'll be as excited with them as we are.
In the meantime, there are a load of special reports headed your way, including the most comprehensive recommended reading list we've ever produced to get you through those lazy days after Christmas. We'll also declare the winner of our Top 3 for 3 competition and start a new one. In fact, each analyst has already selected their top three picks for the next three years. And we've got a Masterclass that may surprise you.
Send us your queries and or call us (1800 620 414) any time up until Friday 19 December but please remember we're closed over the holiday period, reopening on Monday 5 January 2015.
We'll be in touch soon with more details on the forthcoming improvements to our service so please keep an eye on your inbox.