The Month In Review: October 2009
Patrick Stewart
The Market Takes a Breather
October kicked off with the second reshuffle of the DOGS portfolio, which to our surprise had exceeded expectations… impressive considering where the market was when this one began. The saving grace was definitely Macquarie Group Ltd (MQG), which recorded a staggering 75% increase in share price since our recommendation last October. The stock has fallen off the portfolio this time, failing to make the dividend yield; but after its annual results were released last Friday and considering the profit we made from them, we’re not too fazed.
The recommendations seem to have been overshadowed this month by Shannon’s “What I’ve Been Buying” section of the Report, and based on the number of phone calls, emails and Virtually Live questions received, it seems a lot of subscribers are following Shannon’s calls consistently and took part in some of the more recent ones.
The arbitrage opportunities haven’t run thin just yet, as a few quick-moving trades reared their heads. The first was PearlStreet Ltd (PST), mentioned in the first week of October. The stock was then trading at 50c, though with a takeover bid from Campbell Brothers Ltd (CPB) looming at 56c, it seemed this would go though imminently. For PST, a $40m company, this bid wasn’t quite sufficient and it soon rejected the bid. CPB, the $1.5bn company, was quick to come back with another offer of 75c. This instantly sent the share price up to around 73c, and by late October we were out, taking a 46% profit in a matter of weeks.
Another “What I’ve Been Buying” trade was made on Tishman Speyer Office Fund (TSO), and while trading at around 32-37c, it seemed an attractive investment. The property trust was under a hostile takeover bid at 30c from MIRELF III Australia AIV, LP (“Madison”). As the bidder would either have to increase the offer or it would fall over, and TSO would then play catch up with the other property trusts, in our view either way the stock would have gone up, and that’s exactly what it did. Early October saw the Madison bid lapse, giving us an opportunity to get in at around 33c. By 19 October, the stock was trading at around 43c, giving us a chance to exit, and locking in a 30% profit.
Staying on the topic of arbitrage, and we come to Elders Ltd (ELD) and Brickworks Ltd (BKW). To our delight, ELD managed to maintain its spread between the offer price of 15c and the trading price of 17.5c, a little over a 16% profit, and with no scalebacks on the full $20,000 entitlement, this was not a bad result. BKW hasn’t held up as well, trading at around the offer price of $12.40 for a number of days now. It seems this correction couldn’t have come at a worse time for the brick manufacturer. The stock is down over 20% since we got in, while the broader market is down only 7%.
In recent weeks, we have discussed the introduction of CFDs into the business. CFD stands for contract for difference. But for this conversation, let us say that they offer an opportunity to take views on the price of stocks, commodities, currencies, indices etc. This simple, low risk way of hedging a trade to lock in profits while the share price is falling would have been a prime candidate to implement on the BKW trade. Used improperly, CFDs can be a little dangerous, but as a hedging tool, they are a low risk way of locking in profits in certain cases. The reason using CFDs makes such sense in cases like BKW is because CFD providers will allow you to short a stock, which means you sell before you buy. With BKW, one could have bought the stock at $16.00 to get on the share register and be eligible for the SPP, then subsequently short sold an amount of shares they anticipated they would get through the SPP.
We could have short sold the entire amount (roughly 1200 shares), thus locking in a profit on that amount of shares (the difference between $16.00 and $12.40, which is the issue price through the SPP). Then on the day of issue, one would sell the shares they got through the SPP and at the same time, buy back the BKW CFDs they short sold at $16.00. The profit you make on the CFDs will offset the reduced profit on the SPP stock on account of the falling share price.
The final buy for the month was on Transurban Group (TCL). This infrastructure company is involved in the development and management of electronic toll roads. After floating around the $4 to $4.50 mark since February, there hasn’t been a clear catalyst to buy the stock… until now. The company has indicated an interest in conducting two possible toll road projects. The first is the upgrade of the hills M2 and the second is the purchase of the Lane Cove tunnel, but to do this the company would need to raise equity, so that elusive capital raising comes back into play. So in summary, we recommended subscribers take up the stock
At first glance, it looks as though there were a few stocks to be culled last month, though taking a second look, I realise that due to a number of technicalities, we actually haven’t officially got out of any. The much anticipated recapitalisation plan of Babcock & Brown Infrastructure Hybrids (BEPPA) with Brookfield Asset Management had given us hope that we would be able to see the share price reach 43c. Realistically, we were happy to exit closer to 40c, and when the share price reached 40c (only for a short amount of time), we were happy to advise those who wanted out to take advantage of the unusually large spike. Our recommendation stood as a hold to see it through in hope of achieving the full amount.
New Hope Corporation Ltd (NHC) was mentioned last month as an entry into the often risky coal production industry. The share price seemed to move away from us too fast, so we advised those who had buy orders waiting to pull them out. We soon realised that there actually were a fair few subscribers who got set in the stock. NHC paid a fully franked 77.25c dividend late in the month, and with that out of the way and the share price having moved above our buy price, we were happy to advise those who got in to now get out, returning a handsome 10% profit.
Woodside Petroleum Ltd (WPL) is one of our old recommendations that we’ve recently had a covered call strategy on. This month, we advised subscribers to allow the stock to be exercised, and at an exercise price of $46.50, with the premiums accumulated along the way, those who let that happen stood to make $5.88, or a 14.2% profit, before brokerage. But again, our recommendation for those who didn’t take up the covered calls is to continue holding.
Finally, Allied Brands Ltd (ABQ)… after a sell recommendation on 26 October at 15c, the stock quickly went into a trading halt at 14c, preventing us from getting out. The stock remained in the trading halt until 4 November, at which time they came out, allowing us to exit at the desired 15c.
On another note, a few economic issues must get a mention, as the month of October produced a few. The Reserve Bank of Australia raised interest rates 25 basis points, pushing the official cash rate up to 3.25%. Australia was the first G20 nation to do so, increasing confidence in a recovering economy. That was followed up this month with another raise of 25 basis points, pushing the cash rate to 3.5%. Gold hit all time highs of over $US1050 an ounce, due to a weak US dollar. And finally, the Australian dollar hit highs of over US93c. Let’s just hope next month can be as interesting.