Investing is about the longer term in volatile and uncertain markets as opposed to rapid short-term gains made by astute punters. Well-managed companies with good businesses tend to generate steady long-term returns for investors. But integral to selective stock picking is your view on the outlook for a particular sector.
For James Samson, of Lincoln Indicators, Miclyn Express Offshore and Mermaid Marine Australia stand out on his under valued list. “There’s negative sentiment surrounding companies servicing the resources sector,” he says. “And perhaps for good reason, as concerns exist about China slowing and the price of iron ore falling. But Miclyn and Mermaid are ideally positioned to take advantage of servicing the off shore oil and gas industries with their fleet of vessels. There’s more than $100 billion in projects off the coasts of Queensland (Curtis Island) and north-western Australia. We’re talking about projects that have been approved to meet future Asian demand for LNG. So a healthy market already exists. It will be vessels in and out around the clock.”
Samson says Miclyn reported a net profit after tax of more than $US65 million for the 2012 financial year, an increase of 21 per cent, while Mermaid’s NPAT rose 18.3 per cent to $A51 million. “We’re expecting similar or higher levels of profit growth for both going forward,” he says. “These two companies offer a strong investment case. ”
As does ALS Limited, the former Campbell Brothers, an international analytical laboratory group. Samson says ALS has diversified from minerals to food and medicine testing. Diversification adds more defensive revenue streams as the company continues to expand in Australia and abroad. “We expect food and medicine to add stability to long term earnings growth,” he says. Samson says the company’s share price has dived about 40 per cent since May to be trading at $8.28 on September 13. As ALS tests iron ore and coal, Samson says the negative sentiment surrounding commodities contributed to the share price fall. “There was a big premium built into this stock and it was over-bought,” he says. “The premium was rapidly stripped to the point where we believe the stock is over-sold. Our price target is $10.35. Samson says the company reported a NPAT of $224.7 million for the year to March 31, 2012.
Richard Morrow, of E.L. & C. Baillieu Stockbroking, likes explosives maker Orica. “It’s one stock, I would consider buying,” he says. “Recently, the shares have fallen back as it’s been caught up in the backwash of negative sentiment towards service companies to the mining sector, such as drilling firm Boart Longyear. But while it’s easy to wind back spending on growth, the use of explosives is mandatory if a mining company wants cash flow.” The share price closed at $23.67 on September 10. Baillieu’s price target is $29.40.
Michael Heffernan, of Lonsec, begins by saying there’s no urgency to buy the big resource companies and retailers just because their share prices have been hammered. He says the negative sentiment towards big mining stocks, such as BHP Billiton and Rio Tinto, is justified in response to lower commodity prices, shelving of projects and cuts in capital expenditure. “Resource sector stocks have to prove their credentials again,” he says. “In my view, there’s better stock prospects in the next two years than BHP and Rio.” He says growing online shopping will continue to challenge discretionary retailers Myer, David Jones, JB Hi-fi and Harvey Norman. Shoppers, facing soaring power bills and other cost of living increases, will delay buying bigger ticket items, such as leather lounge suites or the latest flat screen televisions, until they feel far more confident.
So that leads to ASX giants Wesfarmers and Woolworths, which Heffernan argues offer sound growth prospects. Heffernan says each company’s diverse revenue streams appeal to investors. In particular, Heffernan says Wesfarmers is benefiting from the Coles Supermarkets turnaround, while Woolworths will gain market share in the hardware space as it continues to roll out its Masters stores. Wesfarmers was trading above $40 prior to the global financial crisis, so Heffernan says there’s plenty of upside from its intraday trading price of $34.75 on September 11.
Heffernan also likes CSL, as it offers multiple revenue streams from selling blood products, vaccines and pharmaceutical products around the world. The company reported a net profit after tax of $A983 million for the year to June 30, 2012, a 4.5 per cent rise on the prior corresponding period. The result included an unfavourable foreign exchange impact of $A108 million. Heffernan praised the result in light of a strong Australian dollar. “If the Australian dollar retreats in line with commodity prices, it will paint a brighter outlook for CSL’s revenue and earnings going forward,” he says.
Heffernan says investors could consider buying Telstra for dividend yield and modest capital growth. With $11 billion to flow to it from the National Broadband Network deal, Heffernan says the already dominant player in the telecommunications industry has the firepower to compete strongly and make market share gains, particularly in the mobile segment. “Telstra’s the full Monty, with 4G (network), Foxtel, broadband, landline and mobile,” Heffernan says. “It has the products and services to attract customers.”
Also on Heffernan’s radar screen is Flight Centre. “It’s well managed, long established, global and increasing profitability in the United States,” he says “It’s a one stop shop – apart from flights, it offers accommodation and recreational tours.”
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