At barbeques across Australia nervous investors are sharing their fears over where to turn with their capital. While few would admit to cowering under the bed sheets at night counting the money they have extracted from the share market, there is little question thousands of investors have fled the markets.
As hard as they tried, it seemed everything they were advised to buy went down in 2011. But right now, more and more financial experts claim we are re-entering a stock pickers’ market. Are they right?
To define such a market analysts look at the correlation among stocks. When the correlations are high, the vast majority of stocks tend to move in the same direction as the overall market. It is in markets like these when retail investors experience rewards in an up trending market with little effort. In down trending markets, they can’t seem to get anything right.
When correlations among stocks are low, you have a market where more and more individual stocks outperform the market, hence the term stock pickers’ market. The trick, of course, is to find them.
The good news is that some indicators suggest that the market may be improving. Since the GFC, the correlation among stocks and risk aversion has been abnormally high. Today, US investment firm AllianceBernstein sees both risk aversion and stock correlations changing for the better. Here is a chart from their site:
The Risk Aversion Indicator is a complicated combination of the implied volatilities of equities, bonds, and commodities along with credit spreads and mutual fund flows. In a risk averse market, money starts to flow out of managed funds and volatilities rise. As you can see, the index has begun to drop in 2012, although it is still well above pre-GFC levels. To the average retail investor, this makes sense as the business news and other sources tell us investors are still quite nervous.
The stock correlations are an indication we may be heading into a stock pickers’ market, where fundamentals of specific stocks can withstand market headwinds.
Now the trick is to spot the stocks experiencing a turnaround and going against market trends.
In the following table we look at 10 shares experiencing very high returns over the last three months. Some of these stocks outperformed the market in the dismal environment of 2011 and have picked up momentum in 2012. Others traded positive, but relatively flat during 2011; others were negative in 2011, but turned around in 2012.
The minimum market cap is $500M and we have included both 1 month and 1 year returns as well. We aim to identify those stocks that have reversed trend or experienced sudden share price momentum in 2012. The one month numbers show stocks that may be slowing. Here is our table:
|Company (CODE) ||Sector ||Share Price ||52 Wk Lo ||52 Wk Hi ||1 Yr Return ||3 Mo Return ||1 Mo Return |
|Ainsworth Game Tech (AGI) ||Consumer Services ||$1.92 ||$0.24 ||$1.98 ||456.5% ||178.2% ||13.3% |
|Buru Energy (BRU) ||Energy ||$2.83 ||$0.52 ||$3.85 ||367.5% ||101.4% ||-14.8% |
|OneSteel Ltd (OST) ||Materials ||$1.36 ||$0.63 ||$2.20 ||-23.7% ||93% ||7.5% |
|Silex Systems (SLX) ||Semiconductors ||$3.80 ||$1.80 ||$4.14 ||-7.96% ||72.7% ||2.4% |
|Breville Group (BRG) ||Retailing ||$4.58 ||$2.51 ||$4.66 ||44.3% ||62% ||7.5% |
|Viterra Inc (VTA) ||Food & Beverage ||$15.57 ||$8.50 ||$15.65 ||36.1% ||61% ||1.8% |
|Ausenco Inc (AAX) ||Capital Goods ||$4.48 ||$1.91 ||$4.72 ||49.9% ||51.1% ||1.8% |
|Seek Ltd (SEK) ||Commercial Services ||$7.40 ||$4.87 ||$7.55 ||11.7% ||45.2% ||3.2% |
|Billabong Intl (BBG) ||Consumer Apparel ||$2.60 ||$1.70 ||$6.87 ||-57.1% ||42.8% ||-7.5% |
|Cabcharge Australia (CAB) ||Commercial Services ||$6.34 ||$3.95 ||$6.46 ||31.1% ||42.4% ||3.8% |
Using 3 month returns as a benchmark, every share in our table has outperformed the ASX since 2012 began. While no one can perfectly time the market, a quick comparison of the share prices above against their 52 Week Lows should lead one to the conclusion there are investing opportunities in this market.
Three shares – OST, SLX, and BBG – were negative year over year but have seen substantial turnarounds over the last 3 months. Of the three, OST and BBG should pique your interest most. While OneSteel was left for dead amongst the downtrodden on the ASX, Billabong was pronounced fit for burial by short sellers who awarded the company a permanent position on the Top Ten Shorted List on the ASX throughout 2011.
Here is a three month share price movement chart comparing BBG, OST, and the XJO:
The Billabong (BBG) turnaround has been sputtering of late and you can see over the last several weeks it is dropping while both OneSteel and the XJO are moving upward. No matter how attractive any turnaround may appear to be, no investor should jump onboard without attempting to understand what began the turnaround. Although Australia based, Billabong’s product lines of outdoor apparel and accessories can be found across the globe. Consumers have become more cost conscious of late which has hurt BBG’s higher end merchandise, as has the Australian dollar. In early 2012 they divested themselves of their Nixon watch and accessories line and embarked on a cost control program to get their financial house in better order.
But perhaps the biggest reason for the turnaround was an offer from TPG Capital to acquire the company. Apparently some investors still believe that kind of interest is still a sign the company has value. In late February BBG rejected the offer as too low, but shares continued to perform well into mid April.
OneSteel (OST) is an Australia-based company with a corporate name that has led many investors to the mistaken belief they are strictly a steel producer. Truth is they are completely vertically integrated, including substantial iron ore mining capabilities. In an odd coincidence, an analyst recommendation report from March of 2012 noted the company should change its name since the investor presentation the analyst had just attended had nothing to do with steel. And on 03 April, the company did just that. OneSteel will soon be known as Arrium Limited. In the past their iron ore mines supplied their steel production facilities but the company now plans to expand its exploration of both iron ore and copper.
The 1 Year Returns for the top two stocks in the table, Ainsworth Game Technology (AGI) and Buru Energy (BRU) are so dramatic one would assume they should not be called turnaround stocks, since those kinds of gains do not happen overnight. The following share price movement for the chart tells the tale:
The price charts of the other stocks in the table tell a story similar to what you see above – flat to modest gains in 2011 and sharp upward movements in 2012 at the same time the world was holding its breath over a possible Greek default, a Chinese hard landing, and a slowing property market in Australia.
AGI makes gaming machines and provides related services all over the world. In midday trading on 03 May 2012 the stock reached yet another 52 Week High at $1.97. On 01 May, BA-Merrill Lynch raised its price target and earnings forecast, citing evidence the company is increasing market share. Investors with the fortitude to stay in the markets could have bought this company for under $0.40 throughout 2011.
BRU is an oil and gas explorer. Right not their principal focus is in the Canning Superbasin in Western Australia. The US Energy Information Agency (EIA) has stated the Canning Superbasin has the largest “shale” or unconventional gas potential in Australia. Investors who refused to retreat to the sidelines have watched and waited as the potential for unconventional gas exploration and production in Australia is in its infancy. Those who got into the game with BRU and many other stocks involved in the gas story have been handsomely rewarded. On 03 January 2012 BRU was trading at $1.25 and has more than doubled since.
In February RBS Australia called Silex Systems (SLX) a “stock to watch.” This is a high tech company with things in the works that are hard for the average investor to comprehend. They are working on solar panels of sufficient size to power utilities as well as a uranium enrichment technology. They recently reached an agreement for the commercialisation of this laser based uranium enrichment technology with US conglomerate General Electric (GE) as the principal partner. While it can be a long struggle between development of a technology and commercialisation leading to profitability, SLX has an impressive array of advancements in technology in the pipeline and could reward high risk investors substantially in the future.
Considering the wall of worry erected over shifting consumer sentiment, the inclusion of retailer Breville Group (BRG) and food and beverage supplier Viterra Inc (VTA) should be a surprise. As the following price movement chart shows, the surprise did not begin until 2012:
Breville Group is in the small appliance business and has expanded their international reach to the point international sales account for more than 50% of their business. Six brokers have BUY or STRONG BUY recommendations on this company largely due to the strength of their North American business. In February 2012 the company announced a 22% dividend increase to accompany a strong earnings report. You can see what happened to the stock price in the aftermath.
Viterra (VTA) is actually Canada based but it trades on the ASX since it owns and operates about 95% of the grain handling and storage facilities in South Australia, one of the best regions in the world for grain production. VTA shares have benefited from multiple takeover rumours.
Ausenco (AAX) Ausenco Limited is an Australia-based company that provides engineering and project management solutions to the resources and energy sectors world wide. Ausenco describes itself as a “growing company with big ambitions whose favorite project is the kind that has never been done before.” The 12 February 2012 contract award to US Gold miner Barrick gold was the first in a string of contract awards driving share price higher. Here is their one year price chart:
The final two stocks in the table – Seek Ltd (SEK) and Cabcharge Australia (CAB) -- are from the Commercial Services Sector. Both had very tough years in 2011, down between 25% and 30%; but both have turned around in 2012.
SEK generates advertising revenue from their online job placement and educational and training opportunities. Cabcharge’s principal business is electronic payment services for private transportation providers such as cabs and limousines. Today roughly 97% of taxicabs, limousines, and water taxis operating in Australia use Cabcharge payment systems. They have expanded to provide payment system software for clients outside the transportation sector.
Here is the one year share price movement chart for these two companies:
It can be difficult for the average retail investor to spot a turnaround event, or confluence of events. Events with turnaround potential may include the announcement of upcoming dividends for shareholders, drilling or exploration announcements, takeover bids, and an earnings release surprise.
The point here is simply this. Even in the toughest of times, there are turnaround stocks out there. But you will never find them if you aren’t looking.
>> Click here to read other articles from this week's newsletter
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.