August - October reporting season should sort out fact from market fiction

The looming New Zealand reporting season that rolls out at the beginning of August is going to be a very good differentiator of fact from fiction.

Has our stockmarket got it right with its wild mood swings and huge markdowns in stock prices for most of our listed companies or has it gone way off track as usual and over reacted to the incessant bad news about the economy and some companies that have had particularly bad recent results and a large number that have had profit warnings?

I tend to err on the side of over reaction.

One stock in the Share Investor Portfolio that has been particularly hard hit over the last few months in terms of share price, Sky City Entertainment Group [SKC.NZ], didn't really participate in the recent upswing in stock prices across the board but its profit is going to be inline with last years result and its market update earlier this year - as it has been for the last 2-3 years when its share price was more than double its current levels. Go figure. Its share price was up 10c this last Friday at market close, on very large turnover, indicating that the result coming out late in August might be even better than indicated.

As investors and market watchers, we already know which companies are likely to underwhelm. The retail market sucks a kumera ; The Warehouse Group [WHS.NZ] , Pumpkin Patch Ltd [PPL.NZ] and Hallenstein Glasson [HLG.NZ] are going to disappoint the market, and that is clear if you just walk around the malls and ask your friends what they have been buying lately, but their respective stock prices have either been steady or up slightly in the last few months. Companies such as Contact Energy Ltd [CEN.NZ] and Goodman Fielder[GFF.NZ] have forecast lower profit this reporting season but their share prices have maintained relative value. Most export related businesses are suffering except for a notable one of two which are doing better than ever -like my own Fisher & Paykel Healthcare [FPH.NZ]. In comparison to Sky City's good February results, this shows little good judgment when it comes to picking companies with good medium term future profits when you look at what value Mr Market puts on them.

A stock that has simply rocketed in share price over the last few months is Restaurant Brands Ltd [RBD.NZ]. That has been an over reaction to a claw back to profit for the fast food operator where its share price has almost doubled from its early 2009 lows in the 50 - 60c range. Clearly this sort of stock movement is a major departure of fact from reality - its profit is no higher than it was 10 years ago and forecasts show only a small rise in profit from current levels, but the market has forgotten the poor financial history of this company and given the stock price a Viagra like status when it comes to valuing what the company is worth.

Telecom New Zealand's [TEL.NZ] stock price seems to have accelerated in share price of late but all indications are that profit is going to be well down on last year and a sense of uncertainly has enveloped company operations because of regulatory and economic restraints and the expense of rolling out their new XT mobile service. Will the market react in a realistic way when the bad bottom line figures finally surface in their accounts in August?

Ahh but you forget about Telecom's big dividend Darren! Attractive to international market watchers and Kiwis alike. Yeah OK, but how long can that last.

Reporting season is always a good way to sort the wheat from the chaff- if you can understand most of the gobbledygook in company reports - and this coming reporting season will be more relevant to that mantra than any other year in recent memory simply because of the economic uncertainty that currently prevails but the time for some caution should come now, when deciding to buy stocks. It looks to me that some are piling into stocks simply because they see stock prices rising and that isn't a clever way to buy, especially in a beaten down market.

I have been buying recently but not all stocks should be bought because they appear to be "on sale". I bought for my own reasons because I consider them cheap and good companies.

I bought more Michael Hill International [MHI.NZ] and Auckland International Airport [AIA.NZ] recently because I like the good management of the former and the monopoly status of the latter.

The stock prices of these two are interesting. Michael Hill's is probably trading at fair value given the dire nature of the retail industry, especially for discretionary stuff like jewelery (I saw nobody in my Albany MH on an otherwise busy retail day last week and they were offering free coffee) but Airport shares are trading at a heavy discount to value given that looming profit will only be slightly down from last year. The yang to that particular ying is that less than two years ago the Canadians and the Arabs offered over NZ$3.65 per share to buy the company, probably then overvaluing the company based on similar profits to this years one.

In my not so humble opinion Auckland International Airport is worth way more than $3.65 per share in the long term, (5 years plus) see monopoly status again for an explanation of that exuberant statement.

Yes, it is a good time to buy stocks because company share prices are on sale but fundamentals still do apply and it is worth looking even closer today than usual because of the x factor of the economic downturn. The reporting season will tell us if we have been right over the last 6 months, at least in the short to medium term, rather than betting on market whims.

I have only a short market experience (around 12 years) but now more than ever the disconnect between the current profit, future prospects and health of our NZX listed companies and its sharemarket value is more pronounced - and that occurred when the market over accelerated in the earlier part of this century as well. Some companies are being way under valued and vice versa.

I guess that is what makes this game interesting, but the rules will change as the profit season reveals its hidden cards.

Disclosure I own SKC, FPH, HLG, AIA, MHI, WHS, PPL, & GFF shares.

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Long VS Short: Ryman Healthcare Ltd

In this ninth installment of the Long vs Short series I am once again going to take look at the chart comparisons for a stock from the Share Investor Portfolio and compare the 10 year return (above chart) to the turmoil of the last year with a 1 year return chart 

In this series I want to show the merits of investing, using charts, for the long-term vs short term gains or losses. I will use the longest available data to me for the long-term view (10 years )and will make a comparison against the NZX50.

In this installment of Long vs Short I will look at Ryman Healthcare [RYM.NZ].

I currently hold 5000 Ryman Healthcare shares in the Share Investor Portfolio which I have owned since November 2006. (see small chart below for detail)

The company has been a very good performer with great returns and is still doing well under current tough economic conditions.

In my 2.5 years of owning this share my return has been a loss of around 17.5%. This includes dividends and tax credits.

If I had bought this share just a year ago my return would have been a 35% loss.

Now for the real point of this comparison lets look at the return for Ryman Healthcare shareholders who have held the stock for 10 years. 

From a high of a 450% return at the end of 2007 the 10 year return as of writing is still around 180%. All those dividends plus tax credits and time has given the long termers another win.

Ryman Healthcare @ Share Investor

Why Did you buy that Stock? [Ryman Healthcare]
Time for retirement?

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c Share Investor 2009

Stock of the Week: Xero Ltd

For this week's Stock of the Week I want to throw caution to the wind and pick a stock in an industry I know nothing at all about except that it has an over propensity of nerds working in it and some of them are billionaires.

The company is Xero Ltd [XRO.NZ] and the industry that it competes in is computer software, in Xero's case online business accounting software, you can find out more about Xero at Kelvin Hartnell's excellent blog, he is a big fan and a happy shareholder.

Warren Buffett says he doesn't invest in companies and industries he doesn't understand and the same goes for me, but some of you out there reading this just might know what this company is about and can see the potential it might have in the future.

Xero has yet to make money, but is making inroads into its sector of competence, big boys like Quicken and MYOB are starting to notice their presence but the company has still yet to make some green stuff. It doesn't look likely it will soon either.

Like I said though, the potential is there to make some big money, if they really take off or lose the lot if the company ends in tears. This is a high risk investment, with any payoff being long-term.

It has some big backers in New Zealand, like Sam Morgan of TradeMe fame but its share price has taken a bit of an upwards trajectory over the last 4 months going from around 65c to its present $1.38 at close of market yesterday, so it makes the company a whole lot more unattractive at these prices.

If you know this industry though, this stock could be for you on weakness.

Good luck!


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Alan Bollard Speaks, but who is listening?

He was wrong about hiking interest rates and he took far too long to drop them again. Now he needs to start raising interest rates but still no sign of that. Last year Alan Bollard, Reserve Bank Governor, also said the recession was over.

How can we then take seriously Bollard's claim made today that:

"New Zealand is likely to begin recovering from the global financial crisis ahead of the pack".

NZ Herald 14/07/09

I am not sure what he is pointing as to evidence of this rather bold claim but his track record is littered with inaccuracies and bumbling wrong moves with a penchant to be somewhat Schizoid.

Is this supposed to inspire confidence for the average kiwi?

The stockmarket didn't believe a word of his pronouncement, rising only a handful of points when the large DOW movement up overnight indicated there should have been a good rise on the NZX today.

More astounding and confusing remarks today from the Gov given his decree last year that the recession was over:

"We appear to have avoided a repeat of the Great Depression. After the plummet in activity through to early 2009, production seems to be stabilising (Europe), to have stabilised (USA) or even turned around (some Asian economies)." NZ Herald - 14/7/09

But didn't he say late last year that the recession was over while we were at the height of the US banking collapse and hasn't the recession continued until the present day?

Well, yes he did and it has:

However, Bollard indicated at a press conference today that he thought the recession in this country was already over.

"If you want to be technical about it we believe the recession has ended and we have positive but very low growth for the next four quarters. It's only towards the second half of next year that one can be sure that we're getting solid growth," he said. "Those numbers in New Zealand can jump around and historically they tend to improve rather than getting worse.

Bollard said the recession was actually quite shallow and a lot shallower than in the past.
Stuff.co.nz - 4/12/08

What the...?!

So if you cant decide from day to day how things were, are, or are going to be Mr Bollard then how are we expected to decide? It kinda makes you wonder of the relevancy of a Reserve Bank Governor in the first place.

Why not let the market decide what interest rates it wants, it would at least be more accurate and reflect market conditions far more competently than a soothsayer.

Best leave the fortune telling for the Woman's Day.


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