The Month In Review: February 2010

Patrick Stewart

Reporting Season Arrives...

February saw the market gain ground after a somewhat poor start to the year in January, with reporting season offering the market some solid results on the whole to kickstart investor confidence.

Traditionally, February can be a rough time on the market, and this February was no exception. The market experienced the ups and downs of reporting season, however we did manage a strong finish, with our market adding 1.49% for the month, while the S&P 500 in the US added 2.85% for the month. The Federal Reserve raised interest rates from the December 2008 crisis levels, stating that the improved conditions warranted less of a helping hand from the central bank. The European Union model continues to groan under debt racked up by certain countries, with Greece now leading in the game of ‘which country is most likely to sink the EU’. Locally, the Reserve Bank left official interest rates unchanged.

It was reporting season in Australia, with pretty much all local companies reporting half year results to 31 December 2009. As usual, there were the good, the bad and the ugly, however we hasten to add that most were good.

Our first recommendation for the month was Myer Group Ltd (MYR). MYR had its Initial Public Offering (IPO) back in November last year. This was by far the highest profile IPO last year and timed its listing perfectly, as markets had recovered strongly and the economy was showing resilience in the wake of the GFC.

Let me remind you that this is a stock we recommended subscribers stay away from at the time of the IPO, which proved to be the right move as the stock plunged close to 27% from its issue price of $4.10 to our recent entry price of $3.23. We recommended members buy it at $3.23 and we have been rewarded, with the stock now up 8.6%.

Late last year, Transurban Group (TCL) received an informal acquisition proposal from the Canadian Pension Plan Investment Board and Ontario Teachers’ Pension Plan, shooting the share price up 17.5% overnight. Thankfully for us, we already held the stock from a few months prior. In January, we decided to take some money off the table, selling half our holding at $5.55, locking in a handsome 30.6% on the stock sold.

At this time, we were still confident that a takeover would eventuate, though as time went on, the silence from the Canadians became deafening, with little upside and massive downside should the Canadians walk away. The only logical move at the time was to exit the entire position, take our profit and move on. So on 17 February, we sold our remaining position in TCL, locking in a combined profit of over 22%

Now I need to come back to reporting season before wrapping up the final trades of the month, and more specifically the strength of the big four banks. While the banks weren’t the only companies to release some impressive figures, they definitely helped drive the market away from panic levels. Commonwealth Bank (CBA) was first to announce results back in January, forecasting some very impressive results… and this was just the beginning. Westpac Banking Corp (WBC) was next up, and the company smashed expectations and not surprisingly, its share price followed suit, as did the other three. By the time National Australia Bank (NAB) reported, expectations had been raised so high on the back of the other results that it was seemingly impossible for the company to impress. The result was solid, but less inspiring than the previous two banks. Australia and New Zealand Banking Group (ANZ) then announced strong results too; not hugely above expectations but ahead nonetheless. Across the board, the banks managed about an 8% increase for the month.

Apart from the banks, reporting season began for us with the likes of BHP Billiton Ltd (BHP) and despite strong results, it was evident at this stage that the market was holding back and the direction was being dictated by macro themes which were hindering the performance of the stock, which in turn brought us to the late sell recommendation for the company. At the price the stock was trading, we had made a profit, minimal though it was. But with some short-term caution, we figured BHP would find it difficult to break upwards in a bearish market, and so a sell while ahead seemed the best course of action. In saying this, we are still very keen on the company long term, but we feel there may be an opportunity to get back in, in the future, at a lower level.

The next to report was Foster’s Group (FGL), which delivered rather unimpressive results; with a declining share in the beer market, which has always been their cash cow, and further losses to the wine division, things weren’t panning out too well. This was reflected in the share price, losing 20c since it reported. Transurban Group (TCL) was a little more fortunate, increasing its profit share on almost all of its toll roads.

We have long heralded our fondness of the property sector, buying into such names as State Street Global Advisors Listed Property Exchange Traded Fund (SLF) to increase our exposure. More recently, we’ve seen an opportunity to leave one property company and move into another, and they are Westfield Group (WDC) and GPT Group (GPT). While we hold SLF, we are exposed to WDC (as it makes up 44.41% of the fund), so broadening our range seemed logical. Although GPT is also included in SLF, it doesn’t make up nearly as much as WDC (only 7.61%).

To the month ahead and things started strong, with the market steadily making gains day after day, somewhat justifying the Reserve Bank’s decision to lift official interest rates, making it the fourth rate rise in this cycle. So what can we expect from here?

We’ve been very vocal of late about taking a more cautious approach, in the short term anyway. There is obviously plenty of volatility in the market, so to avoid becoming victims of a pull back, we are trying to stick to defensive stocks and minimise exposure to companies that will really feel the brunt of the storm, should one erupt.