The Month In Review: September 2009
Patrick Stewart
Some serious spring cleaning
September has turned out to be our busiest month since the beginning of 2008, with a flurry of buy and sell recommendations. The market proved to be ripe for opportunistic investors, giving us opportunities to buy into a number of industries that until now were either too risky, too expensive or too volatile. We were able to get into the often high-risk investment of coal production through New Hope Corporation Ltd (NHC), which has already yielded good results.
The month began when Amcor Ltd (AMC) announced that after its original 4 for 9 entitlement, the company would now be offering 15 times the original allocation... a wonderful result for all involved! Even those members who only took up our original $500 recommendation were rewarded with a return of over twice that, and when the new shares began trading on 22 September at $5.60, along with the 17c dividend received along the way, the trade was closed out with a little over a 30% gain!
Our feelings have been made very clear that despite the amazing recovery the market has seen since March, we do feel there are still excellent opportunities in certain areas of the market. Certainly, some sectors have run a little hot for our comfort, but some sectors and stocks have surprised us at the extent of their underperformance.
Foster’s Group Ltd (FGL) is one such example. With the introduction of Ian Johnston as the new CEO, the issue of a demerger was brought back to the table. FGL’s beer division (Carlton United Breweries) is an absolute cash cow and has been as steady a business as there is. At the same time, its wine division, while having some great brands like Penfolds and Rosemount, has endured a torrid few years on the back of grape oversupply and a strong currency. This places the company in takeover territory; and as Kraft making a bid for Cadbury shows, cashed up corporates are willing to spend on the right name. FGL stands out as a clear target due to the obvious potential in splitting the two businesses (beer and wine), so at $5.50 it seemed too cheap to pass up. We see FGL as a low-risk investment with strong potential of a takeover bid, demerger or re-rating.
On the same day, another opportunity presented itself in the form of Peplin, Inc. (PLI)… a takeover arbitrage on this Australian listed, US-based dermatology biotech company. This was classified as a medium-high risk trade due to the nature of the deal, and of course with these offshore companies, currency fluctuations add risk, though on the flipside, that could work in our favour if the dollar falls away.
Brickworks Ltd (BKW) was the final buy recommendation for the month, and true to the year we’ve had, it is a new Share Purchase Plan (SPP) to finish the month out. This was a one-day only opportunity to take part in the SPP before it went ex on 28 September, and at a little over $15, the premium over the offer price of $12.40 was too attractive to pass up.
September being the fist month of spring, we thought it only appropriate to do a little cleaning. It was Asciano Group (AIO) that was first on the chopping block. After an original buy of $500 worth to take part in the capital raising, we were struggling to find a reason not to buy the stock as a straight buy at the depressed price of $1.32… and we issued a half sell at around $1.59 only two weeks later. Once the entitlement offer and security purchase plan were complete, we found ourselves in a position where we held a great deal of the stock. We must not forget that this stock was trading at over $4.50 only 12 months ago, so with strong management, a clear outlook for the future and having recently cleared the majority of its debt, it was looking like it had a lot of upside. However, after assessing our position, it now seemed that the easy money had been made and was now behind us, and with the stock trading at around the $1.60 mark, we felt it appropriate to take our money off the table, resulting in an average 37% gain in three months.
Felix Resources Ltd (FLX) is a coal mining and exploration company that has effectively been for sale for over a year now, and the global financial crisis obviously slowed things down. Once Chinese miner Yanzhou came to the table and bid for the company, we saw an opportunity to make a small profit on what looked like a pretty low risk situation, and at $17.80, the risk/reward ratio seemed viable. To our dislike, there was a statement released by the FIRB board late last week which subsequently placed a halt on all takeovers from foreign companies in the mining sector. This increased the risk level and on that basis, we felt it unnecessary to be in the stock any longer, and even with the small loss we were sitting on (6%), we were no longer comfortable with the situation.
Rivkin Rule # 11: Never be afraid of a small loss; it often avoids a big one.
After assessing the current level at which the financial sector is trading, we have been very wary of what may happen should a correction eventuate. The Big Four banks have risen in some cases by 90% since their lows in March. It’s Westpac Banking Corporation (WBC) that has been the worst performer, only recouping 65% since its low, which is hugely impressive nonetheless. While still holding three of the four banks, they are beginning to look a little expensive. Even with the increased strength on the balance sheets from all four banks conducting some huge capital raisings in the past 12 months, in the short term, we feel the easy money has been made. On that note, we issued a half sell on all our bank holdings… Australia and New Zealand Banking Group Ltd (ANZ), National Australia Banking Group Ltd (NAB) and Westpac Banking Corporation (WBC).
The final sell of the month was on RIO Tinto Ltd (RIO). One of the more common measures of global trade activity is the Baltic Dry Index (BDI). The BDI broadly covers international (not just the Baltic) dry bulk cargo shipping prices, in USD. Given the relative fixed supply of ships, shipping prices quickly move up when demand is up, and demand is up when customers are buying, and when customers are buying, prices are usually on the way up; so the BDI is a leading measure of economic activity. There is a direct correlation between the BDI and commodity based companies, and after comparing RIO and the BDI on a graph we can see the direction in which RIO will go by looking at past results. Up until recently, RIO’s share price has surged along with the rest of the market until June and has essentially flat lined, while at the same time the BDI has begun to drop off very quickly. This in the end was the catalyst for our selling of the stock.
On another note, our Covered Call strategy is powering along, with a top up on our Telstra Corporation Ltd (TLS) holding allowing us the option to write some calls on the stock. The Woodside Petroleum Ltd (WPL) covered call was rolled over again this month and Oil Search Ltd (OSH) is one we think we could possibly squeeze some extra cash out of this month, writing a November call on the stock.