Market Correction: Excitement Building!

Once again global stockmarkets are rightly nervous about the so-called economic recovery in the United States, with Obama acting like Robin Hood without an arrow and rumblings of credit clampdowns in China, the DOW has lost almost 5% in one week as a result.

It is bloody exciting!

I was getting sick of the disconnect between the reality of a debt led "recovery" and the fantasy of investors in stockmarkets like the DOW, who have pushed that particular market up by over 40% in less than a year -incidentally that is the largest bull run since the 1929 Wall Street crash and we know what happened after that particular market "recovery".

Yep 40%, does anyone think we are doing that much better now than we were this time last year?

Not this fellow.

I last bought stocks in July and haven't felt tempted yet until The Warehouse Group [WHS.NZ] shares took a dive recently, simply because some companies are overvalued compared to 12 months ago.

The excitement is building now for me as there looks like reality could have dawned on some and they could be rushing for the exits as I am happily ready to enter the market again at a better price.

One the economic outlook, there is anecdotal evidence on my part - I tend to trust that more accurately than what economic soothsayers are being paid to say - that the economy in New Zealand, while not completely buggered, is still hanging on a knife edge between growth and recession and it appears that any growth is going to be sporadic and a long time coming.

There just isn't any money out there.

A good time to buy assets if you do have some moola and the NZX is likely to take its lead from the US market where it dropped by over 200 points last Friday.

Happy buying.


Recent Share Investor Reading

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c Share Investor 2010

Reason to be cautious on Nuplex forecast

2009 was Nuplex Ltd [NPX.NZ] worst year on record, with a massive capital raising big losses and a huge dilution of value for their shareholders.

2010, according to Nuplex, is going to be their best year on record with an estimated profit of between NZ$120-135 million. This is after 3 profit upgrades in the last 6 months.

This is good news for the company and as shareholders you might be thinking that and you are probably right to think that but then I believe you must treat these results with an element of caution and this is why.

Like their worst year in 2009, management did not "foresee" that coming and according to managing director John Hirst the 2010 upgrade has been:

"...proving as difficult to forecast the upside of the post global financial crisis period as it was the downside at this time last year..."

In addition to management's inability to forecast accurately, their current forecast is expressed as, earnings before interest, taxes, depreciation and amortization (EBITDA). This measure of accounting practice can be used to hide detail that should be known by the shareholder and is pretty much the accounting equivalent of hiding nuts under shells. Unfortunately it is used far too often by lazy, ineffectual accountants directed by lazy dishonest directors to hide bad figures from shareholders - look deeper Nuplex shareholders!

Given the inability of the company to accurately forecast results over the last 2 years and also given that the same management who governed the company into their worst ever year in 2009 and left them on the brink of bankruptcy (they would have gone down the tubes if not for generous shareholders) are still at the levers of power, one would have to take a closer look at Nuplex forecast for 2010, especially when one considers their "cavalier" attitude to accounting practices and therefore their shareholders .

Beware.

Nuplex @ Share Investor

Nuplex rights decision a dilemna for shareholders

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c Share Investor 2010

Cadbury Acquisition a good deal for Kraft

I am still following the Kraft Inc [KFT.NYSE] acquisition of Cadbury PLC [CBRY.LSE] . A conditional deal for sale of Cadbury to Kraft has been approved by Cadbury management but it still needs the approval of both Kraft and Cadbury shareholders.

Nearly 10% shareholder of Kraft, Warren Buffett, publicly came out against a deal on Jan 5 and today on CNBC indicated that he would have voted against the acquisition.

The latest comment, if it isn't just being made to blow off some steam, appears to suggest that Kraft is paying too much for the maker of Dairy Milk, Jaffas, Chrunchie , Moro and other well known brands but this is where Buffett and myself part company.



Cadbury is a global brand and has dominance in the majority of the markets that it operates in, New Zealand is no exception.

Because of its strong brand position globally, its potential to grow in all its markets - especially in Asia - and the largely untapped market for Cadbury in the United States -where Cadbury is a minor player - the price to be paid for full control of the company must show a healthy premium to its recent trading activity. Cadbury has a strong economic moat - good brands, with high cashflow with a reasonable barrier to entry by competitors.

Warren Buffett seems to be ignoring this fact and it seems contrary to previous indications by him that in order to gain control of a company during an acquisition a premium is more often than not paid.

The price being paid by Kraft for Cadbury isn't the deal of the century but it is approaching fair price - on Kraft's part - considering what Kraft are getting for their shareholders moola.

Locally, New Zealand media have been speculating that Cadbury's Dunedin factory maybe the subject of staff cuts and that local brands maybe for the cut. While this is of course possible because of Kraft's high debt levels due to the acquisition and pre-deal debt levels, it would be folly on Kraft's part to repeat the recent mistakes of Cadbury in New Zealand and in other global markets.

I am having sugar overload over this deal. The Kraft acquisition of Kraft is not yet a fait a compli however, so there is still room for a diabetic attack. There is still time for other Cadbury tyre kickers like Hershey to make a higher bid for some of the sweet brown stuff.


Cadbury @ Share Investor

Bitter - Sweet Chocolate Business
Cadbury could learn a thing or two from 1980's Coca Cola Experiment

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c Share Investor 2010

Stock of the Week - Reprise : The Warehouse Group

In this Stock of the Week we are going to be looking at New Zealand's dominant general retailer The Warehouse Group [WHS.NZ].

I picked it in June 2009 as a Stock of the Week and am including it again in 2010 for much the same reasons.

It has been trading at a pretty steady share price for the last 12 months (marking time until news about its sale is forthcoming) at a range between NZ$3.00 - $4.55 and represents value whether you want it for a quick buck for its probable sale or if a sale falls through and you want a good solid company for the long term portfolio.

It approached around the middle of that range, closing at $3.88 today.

On its long-term merits the company has a dominant position in its sector of the retail market and a great cash flow that helps contribute to a gross dividend north of 8%. Spectacular in these days of 3-4% returns for term deposits or 5-6% for rental property.

Retail is struggling these days but that isn't going to last forever and The Warehouse is coping well with the current recession. It historically does well in recessions because of its low price perception.

Its 2009 Christmas trading period was flat in terms of sales and that is no surprise as other retailers experienced similar trading. The key will of course be the margins.

The company has recently met its own forecast for profit in its October release of its 2009 full year profit (see 2009 annual report for details) and its forecast for FY 2009 is on track to meet last years profit of $90.76 million.

I am looking at taking the plunge again to add to my holding.

Good luck!

Disclosure - I own WHS shares in the Share Investor Portfolio

Stock of the Week Series

Reprise - Contact Energy Ltd
Restaurant Brands
NZ Refining
Ryman Healthcare
Mainfreight Ltd
Fisher & Paykel Healthcare
Xero Ltd
Auckland International Airport
Sky City Entertainment Group
Burger Fuel Worldwide
Michael Hill International
Contact Energy Ltd
The Warehouse Group
Fisher & Paykel Appliances
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The Warehouse Group @ Share Investor

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Stock of the Week: The Warehouse Group
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Long vs Short: The Warehouse Group
Warehouse bidders ready to lay money down
The Warehouse set to cut lose "extra" impediment
The Warehouse sale could hinge on "Extra" decision
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Commerce Commission impacts on the Warehouse bottom line
The Warehouse in play
Outcomes of Commerce Commission decision
The fight for control begins soon

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c Share Investor 2009 - 2010