The 'Buy & hold' strategy

A popular strategy supported by a great deal of financial advisors is the "buy and hold" strategy. There are times when this strategy makes sense, but it isn't because of the veracity of the strategy so much as:
1. The merits of a specific stock
2. The commitment of specific companies to a winning strategy. Some strategies can endure for decades before they fail. In other cases, corporate teams prove themselves adept at changing strategy.

I don't take much interest in my father's investment activities. For years he was telling me that he's not looking for capital growth but rather regular incomes. He was of course trying to avoid taxes by nor selling. In Australia this logic makes less sense with a 'generous' 50% capital gains tax concession after one year. He bought  QBE Insurance at  $9.00, watched them rise to $35.00, only to tolerate a fall back to $10.00.
Why did he persist with this stock as its capital gain eroded? Until the very end, when he finally asked me if he should keep QBE, he said to me "Should I keep QBE, it pays a good dividend"?

People's psychology is the greatest obstacle to their success. My father manages his own wealth but he has a broker who recommends stocks to him.
Despite being a mining analyst, he scantily trusts the stock's I buy. "Too risky" according to him.  Yet I can diversify risk. More importantly, these are small stocks with a single project that are relatively easy to understand. But it is a different world. It's an analytical world compared to the purely empirical foundation for valuing blue chip stocks. Just my father didn't see the capacity to mislead investors with empirical evidence. He lacked analytical insight which would have undermined his confidence in this particular stock.

Why was my father seduced by this stock? Why did he retain it in the face of a falling share price. Well there are several reasons:
1. Strong dividend: The company could payout more dividends from the strong share premium reserve.
2. Share price volatility: This would give him confidence at times because it fell before and rallied.
3. Historic legacy: It was a growth stock before so it will remain so.
4. Long term investor, who is seemingly oblivious to significant marker swings. Ask yourself who benefits from that strategy - his opponents - professional fund managers vying for the opportunity to manage his money. One cannot tolerate large swings in share price. Draw a line in the sand and forgo only so much money. We are all capable of being wrong and stocks are conditionally good or bad.

I don't buy blue chip stocks. In fact, I have no interest in investors like my father. My interest is in investors with a desire to make capital gains or early investments in great stocks before they become low growth "yield propositions". These types of stocks make even less sense today. It was a forgivable strategy in the 1990s until 2007. I warned my father. In any case, I'm interested in engaging 10 to 35 year old investors who want to take the time to develop intellectual, technical and commercial efficacy, which will aid their capacity to make money in the market or in business. There is utility in one's entire life. Am analytical thinker ought to be open to evidence. My father was compartmentalized. He diminished the importance of certain information that didn't reconcile with his narrative. This can be lucrative until it's wrong: then it's expensive due to the systemic risk.

Why blue chip mining stocks are making less sense

We have always sung the praises of speculative mining stocks. The truth is that the 'under-loved' speculative or emerging mining stock has never been more under-loved, and yet offered so much opportunity. This can be attributed to a number of developments. Conventional wisdom was that the larger multinational miners were 'low risk' because they offered diverse exposure to different countries. I've always questioned this wisdom as a dogmatic truth, but its becoming ever so apparent in mining. In the 1990s I observed how power generations  sponsoring big power plants were targeted for all manner of political reasons. Their attempts to commission plants were just thwarted at every turn. The same is true now for miners. Increasingly miners are confronting governments which are reneging on their taxation arrangements, whether its Australia, Ghana, Mongolia or China. The times are changing. The other problem is that the pricing powers of these major companies are being unwound, not simply by more competition (often sponsored by China, India, Korea, etc), but also pricing regulations in consumer nations. China, with out a doubt the most important consumer market, in August 2008 adopted an anti-monopoly law to prohibit price fixing.

The law prohibits 'abuse of a dominant market position; and the concentration of business operations that which may exclude or restrict competition' (Ref.1)

The iron ore and coal markets have witnessed a great deal of concentration in market share over the last 2 decades. There is good reason to think that market pricing power is over. But you could also argue that its simply just about to resume again. The Chinese government blames to be cutting down on corruption. Call me cynical, but I'd argue corruption just acquired a new rationalisation. Never believe the rhetoric. Having said that, markets are adjusting, and the outlook is for rapid expansion in traded volumes rather than prices.  Will there be new pricing patterns? Expect price regulating agencies to get a kickback. How can you stop higher prices without breaking the high market concentration. Major companies can't be stopped from driving higher prices. All it takes is for a few major companies to decide that the biggest producer on a certain date sets the prices, and everyone asks for ridiculously high prices until the 'leader' settles, in which case, that price becomes the reference price. That will be the new tradition. There doesn't have to be any secret handshakes or encrypted message; simply a tradition. Matters for the major companies are far worse in Australia, where sovereign risk was once considered far less. Such conventions have been proven wrong again. The Australian Labor Party-led government has appointed a new Resources Minister Gary Gray, who  has ruled out making any changes to the mining tax but has conceded it could have been handled better. Of course he is probably not going to repay lost earnings to shareholders. Gray said it will be “business as usual”. I guess that means taxpayer extortion 'as usual' (Ref 2). The Mineral Resource Rent Tax (MRRT) was originally adopted by former leader Kevin Rudd. He was dumped over his handling of the tax.

Thirdly, there is another huge problem for large miners and that is all-manner of objections to their projects, whether because they are large, because of their impact on alternative land uses, the environment. The liberals in the environmental movement seem to take special pleasure in targeting these large projects, and legislation often gives them powerful tools to obstruct them. The courts have proven particularly useful in blocking developments. Such objections can stop or  slow smaller projects as well, but largely the focus is on the major. These conflicts can obstruct development or they can drive huge compensation pay-outs for contamination of aquatic (maritime, rivers or estuarine) environments. The most famous case is BP's oil spill in the Gulf of Mexico, however BHP's Ok Tedi gold-copper mine in PNG also comes to mind. Multinational companies today are less able to rely on the complicity of government officials, who receive a royalty from such mines, or who might even have equity.

The multinational miners have historically traded at large premiums or earnings multiples on the premise that they were low-risk propositions. This premise needs to be questioned, and its not just miners. Facebook has experienced a roller-coaster ride since listing. These companies are enormously liquid, so its easy for large funds to play 'trading games' with them, but given that these companies take large leveraged bets on these companies, investors need to trade wisely.

These risks bring me back to the benefits of small companies. Small companies, unless they have a highly profitable mine, will not be offering sustained earnings in this period of recession. Most commodity economies have high currencies and prices are softer, costs are high, so we can expect some to struggle. But these companies are also taking this recession to rebuild resource provisions so they will be better prepared moving forward. They can therefore be expected to be more competitive cost-wise when commodity prices do recover. If you are interested in the speculative stocks, we have a eBook 2-volume set dedicated to investing in 'Speculative stocks', as well as a blog for describing a number of the companies, as well as a blog where we discuss the commodity outlook.

References:

1.  “CHINA IN TOUCH: A newsletter for Northern Territory”, Northern Territory Branch, Australia-China Business Council, website, 6th Aug 2008.

2. “Gray won’t change mining tax” by Alex Heber, Mining Australia, website, 26 March, 2013.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide

Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Why Facebook shares dived

It’s not surprising that Facebook shares dived – I can give you a number of reasons:

1. Facebook does not control much of a revenue stream – it controls a conduit which is proving hard to make money from.
2. Clicks and impressions simply are not converting into sales
3. Investors wanted out at the top – that is why the company was listed
4. The initial listing is the best opportunity a company will get to offload stock because of the liquidity floating in the market.

At some point the company will support the stock with a buy-back. It will do that in order to support placements of more stock at comparative prices. Facebook is a high-risk proposition. It is still very easy for competitors to challenge its market position. 

People can look at the collapse as a testament to market weakness; but I see it as a strategic decision by long-term stakeholders to exit a risky stock. That rationalisation however will serve as a useful basis for manipulating a recovery in the stock price. Facebook is trading at an EPS of 74x earnings compared to 18x for Google.[i] Facebook of course has the less well-proven revenue model, but that is just part of the risk. The way we interact with the internet is open to big changes, and there is no reason to think that Facebook can buy out ever fad that threatens it, or even pick the right ones. It is going to struggle to prove that it has the capacity to raise earnings 40-500% in the next few years. There isn’t enough stock in the market to see a huge collapse, but expect such a move with the next offloading of stock.

References

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[i] “Facebook shares plunge 11pc, spooked investors look for answers”, NZ Herald, website, May 22, 2012.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook   Global Mining Investing Community.

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Adamus Resources (ADU.ASX) & Endeavour Mining Corp (EDV.TSE) merger

Its not really a blue-chip proposition, however the forthcoming merger of Adamus Resources (ADU.ASX) and Endeavour Mining Corp (EDV.TSE) strikes me as a good deal for all concerned because:

1. The merger will raise the ranking of two gold stocks - so more attractive to institutions

2. The two listed entities will be on two stock exchanges - at least

3. The two companies are a good fit - Endeavour is cashed up

4. They will be able to wipe out a hedge book

5. They have a lot of upside from project expansion and exploration

6. The gold price can be expected to rally in coming months as uncertainty arises over the recapitalisation or debasement of the EUR. I'm expecting gold to reach $2500/oz.

7. Benefits of a diversified mine operator

Anyway, this seemed like a compelling time to buy an emerging gold stock, even if I was a little late in doing so. I've been focused on other things lately with the election in NZ, and the preparation of a book. In any respect, this is my first stock investment in a few months.

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Andrew Sheldon www.sheldonthinks.com

Rio Tinto alumina spin-off a dog listing to retail investors

The financial 'vultures' are circling. What type of asset is well-suited for a listing on the NZ stock market? A dog like Rio Tinto's alumina assets? You watch as a number of large investment bankers swarm to engage in a capital raising for this 'spin-off''. Small investors will be offered stock and brokers I guess will be looking for a very lucrative 7% commission to cove their asses. Why would they jeopardise the reputation of their company? Perhaps because they work on commission? Perhaps because they have performance-base options which encourage them to think short-range.

I have already commented on the quality of these assets being sold off by Rio Tinto. One has to wonder whether these financial companies actually insure their exposure to these 'clients' in terms of their handling of these capital raisings. Of course these investment bankers have not done anything wrong yet by showing interest in the sale of their assets....but what exactly will they be getting paid millions for? To paint an objective picture of the assets for sale? I don't think so. To create the illusion of quality. Remember, like like POLITICS 101, perceptions are more important than facts.

You could well argue that any asset is a buy at some price....but this asset will be offered to long term investors, not day traders looking for stag profits.

I've seen this all before. I am reminded of a company called Queensland Magnesium which was raising capital in Australia about a decade ago. As an analyst at the time working for a broker, I noted that the major financial institutions were earning a 7% commission in order to sell this dog. Why was it a dog? Well, it was the nature of the magnesite market - the raw material for producing refined magnesium. I was negative about the project as a mining analyst. In fact - very negative. My boss said that they would not recommend it, but if the investors wanted it, then of course they give it to them. Rest assured that no stockbroker selling such a 'dog' to clients was going to knock back the opportunity to make 7% commission. In most cases they would typically get only 5%.

PS: Queensland Magnesium Corporation went broke within the year if I recall correctly. I'm a bit hazy on the dates, as this was a decade ago. Shareholders lost a great deal on that deal. The way markets are regulated, there is just utterly no sense of reality. The risks are not being borne by the people who should be bearing them; whilst some law suit is destined to hit a corporation's current shareholders long after the parasites have taken off with their stock options. Just consider the current example in Australia. There is a legal firm taking a class action against the banks over their misappropriation of bank fees. Who will pay? The executives who got stock option bonuses at the time - or current executives. We teach our children that their are consequences for their actions. Where are the consequences for the executives who cause systematic pain across a nation? Where are the consequences for the politicians who sanction or facilitate law changes which help these executives to be corrupt legally. We have ombudsman to ensure that government depts and corporations act in compliance with the law. But what is the law is skewed to allow people to profit 'legally' but immorality?

That is why I have a concern about sanctioning the election of Don Brash, the leader of the ACT Party, the former leader of the National Party and former Governor of the Reserve Bank of NZ, for this 2011 NZ election. His ignorance is woeful...though he does respond to my questions; at least until they become uncomfortable. Here is my dialogue with Don Brash about the fiduciary duties of Reserve Bank governors and governments.

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Andrew Sheldon www.sheldonthinks.com

RIM likely to find support

Research in Motion (TSE:RIM or NASDAQ:RIMM) is a stock that has emerged on my radar screen. The company's flagship product is the Blackberry smartphone. This phone has always been very popular with the business community, and we think the company is likely to have a resurgence, but perhaps under Android or Windows OS, or both. i.e. Letting the customer decide. It was never really software that distinguished it in the market was it? And how could you go wrong by adopting the same software as your competitors with a brand like Blackberry. There are other reasons as well:

1. The market is abuzz with tablets and touch screens. These are marketing gimmicks, and RIM is right to not get bedazzled by them. I can touch type far faster with fingers than I can with a touch screen. Buttons have edges; screens don't. I have never understood the appeal of these tablets either. They are tomorrows dinosaur. Expect netbook, mini-laptops and full-size laptops to dominate. Touchscreen is a fad with limited use.

2. Trading on low multiple: RIM is currently capitalised at $28 billion, it has $2billion in cash, and a PER of just 4.7 according to Google Finance.

3. Upside is huge. The market for Blackberry's are a discerning crowd. I personally prefer the Nokia E5, however people can expect a similar experience from RIM in forthcoming models.

Expect their new releases to grab sales from loyal business customers, i.e. Might it be selling off another 25,000 units to GM? I think so. These customers, unlike the retail customers, are sitting on the side, and not just for RIM's new product, but for new Android applications to justify dumping their old phones.

For this reason, I am expecting some good news from RIM in coming months. But what would I know....I am just a mining analyst who loves my Nokia E5. Want more info on RIM - I am responding to this story and Google Financial data.

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Andrew Sheldon www.sheldonthinks.com

Silly acquisition for BHP-Billiton

This is a silly acquisition by BHP-Billiton. If you are going to invest in might oil & gas prices they should be looking at greenfields areas, or green technologies. For example, they ought to be exploring offshore NZ or India (as BP is doing). There is also compelling reasons for it to enter algal technological development, though it might well argue that it makes more sense for it to just purchase the technology when someone else has developed it. The problem is - the technology might be acquired before they can even get their hands on it by one of their competitors. Might it be difficult to know who will be the leader? My guess the oil company throwing the greatest amount of money at it..... at least you will get a market advantage....rather than throwing it away on market speculation.

The reality is that these companies are more interested in building on economies of scale, adding market premiums rather than creating wealth. They are accreters of assets, not builders of assets. Which means they just take advantage of cheap capital in global capital markets to add value, which is passed through to shareholders after they take their bite. Yes, it was always about the CEOs....leave the risks to the small enterprise which really build wealth. The small companies find the oil; the large companies spill it around the world's oceans.

OK, a little unfair. :)

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Andrew Sheldon www.sheldonthinks.com

Discretionary showroom retailers are under threat

The shift to online commerce is a shift that major retailers of discretionary products have failed to anticipate. They really did not appreciate their vulnerability, and this is true for several reasons:

1. Economies of scale - Online sellers have far better economies of scale

2. Superior profit margins - Online sellers have slightly higher distribution costs, but they have much lower capital overhead, staff costs and warehousing costs. They don'y have to sit on as much dead stock.

3. Sales exemption - In many countries online retailers can avoid sales taxes, whether they are claimed legally or illegally by the buyer of the goods.

4. Recession - People are looking for discounts more than ever.

5. Security - People are feeling more and more secure buying product online, and are broadening the range of product they buy online.

6. Less staff turnover - Showroom retailers rely on cheap youths whose jobs are seasonal, and the consumers buying habits are also seasonal. Online websites can be internationally integrated.

7. Fewer product returns - Online buyers are less likely to return products.

8. Product disclosure - Online sellers have a far easier and more effective product and sales policy disclosure. There is a tendency for customers to just trust major traditional retailers.

9. Regulation - Online sales are regulated by the market. Online sellers are far more accountable than showroom retailers because unhappy customers can get online can discredit a business, and any maligned customers soon establish a presence. If I was unhappy customer of Harvey Norman, I might find that the company has technically done nothing wrong, i.e. There are loopholes in arbitrary statutory law, or I might find that the government offers few resources to assist retailers. For online customers, they need only search for 'RETAILER, scam, bad service, complaints' and see what comes up, or go to forums. Once you high a reliable supplier, you can stay with them, or keep searching.

10. Online sellers stock the latest products and at reasonable mark ups. I suspect that manufactures have dropped the discrepancies between major product markets. i.e. the latest digital camera in Japan might be $500, but in Australia it will be $1200. Over time that price margin will erode, but you will always be buying old product.

Consumer Backlash: Some traditional 'showroom' retailers are lobbying governments for tax concessions, and are being attacked by consumers who oppose their lobbying to increase taxes on the consumer. Those in the firing line in Australia include Harvey Norman, Myer Group, and others. These companies and others have set up a coalition to lobby the government. The problem is - they only have lobbying muscle so long as they are able to create jobs, and they are a dying industry who only preserve some relevance for those elderly people who have not grasped the internet, and who don't have grandkids to help them. Expect tools in the future to help those elderly people adjust, i.e. Some product search feature which trolls the databases of major online retailers.

The reality is that any consumer complaining about the high mark-ups of Australian retailers are not likely to pose much of a threat to these retailers, simply because they are the people already enjoying the benefits of online buying. The problem is the lobbying by the retailers themselves - they are effectively telling customers they can save 50-80% by buying online. They are posting nationwide newspaper advertisements to tell them. Basically any 'showroom' retailer selling discretionary items is going to suffer because people can afford to wait a few weeks for these items. The biggest exponent of tax reform has been Gerry Harvey, and he is being savaged in the traditional and social media for his support of adopting the GST upon foreign online sales.

Looking at the stock prices for these two companies -Myer and Harvey Norman - and it is safe to say that these businesses will be a shadow of their former self, and will eventually disappear. You soon realise that many of the services they provide can be offered by online sellers as well, if they ever needed to.

The Australian 'showroom' retailers are particularly vulnerable if they don't own the stores and since they are not integrated in with railway developments. The good news is that the Australian economy is very strong, and there are a lot of wealthy who are not terribly discerning about where they buy from, and thus not particularly fuzzy. That price gap will be closed. In Japan, 'showroom' retailers like Sobu and Toban are vertically integrated with the ownership of railways. I think people will want to go out and 'window shop', as they do in Japan, but I think you will find people increasingly just walk into the store, kick the tyres, eat at a restaurant and go home, knowing that they had a nice day out "virtually" shopping, before they do their "real" shopping online. Harvey Norman, CEO of Harvey Norman Ltd, attributes this trend to the 10% tax. Nonsense, its the least significant factor.

For my thoughts on Gerry Harvey's tax lobbying - see here.

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Andrew Sheldon www.sheldonthinks.com

Coalspur (ASX:CPL) - a company making project

This is not strictly a blue-chip stock but it will resemble one in a few years since a company-making mining project. Australian coal miners have always competed with Canada, Colombia, Venezuela, Indonesia, South Africa and China in the seaborne coal market. Colombian coal mostly goes to Europe, South Africa is for domestic, EU and Asia, Venezuela to EU & USA, Indonesia for domestic and Asia, and increasing China is for domestic, as it can afford little export capacity given its burgeoning energy market.

West Coast Canada coal mining capacity lies amongst the Rocky Mountains. Most of the coal is used for domestic applications, however when prices have been high, some capacity has always leaked in to the Asian market. A strong Chinese demand and an appetite for coal from other sources than Australia, makes this company particularly appealing.

Coalspur (ASX:CPL) is developing a 900Mt thermal coal resource in Western Canada's Rocky Mountains. It is a lower quality coal (5800kcal/kg GAR) compared to Australian projects (6400kcal/kg GAR), so its $48/tonne FOB operating cost is not directly comparable. I suspect this local port can only do panamax ships (70,000dwt), so they will have a freight penalty to Asia, but perhaps not NE Asia (China, Japan). Canada appears to have a 15% federal resource tax judging from the feasibility study. The project is expected to generate cashflows of $110-180mil per annum. Expect this project to find a Chinese financier looking for project equity and marketing rights. For more info refer to www.coalspur.com/asx-announcements.

West Coast Canada has always been an exporter of coal to Asia, and it does not have the same potential as Australia for new capacity. This project however has a large resource. I suggest it has remained undeveloped until now because of the low coal prices before they took off a few years ago, and because the coal is lower energy. There is probably good reason they will stay high given the Asian demand for electricity, and prospect of electric cars.

Most mines I think in West Canada have been developed primarily for the domestic market. So long as China is strong, this project has value. i.e. It is vulnerable to a collapse in Chinese economic activity. I expect China to take off though, so I see little reason to expect a collapse. The company has placed shares to a strategic investor, ie. 67mil at 50c, raising $35mil, plus $7mil, so they have $42mil, which will allow them to finance some project development. I have no idea why the options were given 1:2 so cheaply. The company has 367mil shares at 77c worth $270mil. See Google Finance for a stock chart - support is at 60c, but personally I would not be surprised to see them fall back to 45c after an issue.

I have mixed feelings about this one because of the issues already make. Too much corporate activity is happening behind the scenes. I think this could have been a far better investment for you, and I was a bit late finding it. Just one to watch until it falls to one of those support levels. A mental post-it note for all of you. The project does have the capacity to produce a great deal of coal as there is a lot of unused coal export capacity in the region I suspect. These issues need to be considered. I called this a 'blue chip' only because I won't be buying it.

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Andrew Sheldon www.sheldonthinks.com

SMH tips - a mix of good and bad

I note that the SMH is recommending a few stocks, some of which we think look good:

1. Abacus Group (ASX:ABP) - see http://www.google.com/finance?q=ASX:ABP - the chart seems to suggest to me they are consolidating before making a move

2. Fairfax Media Ltd (ASX:FXJ): I much like Fairfax Media limited as well because I see the media companies benefiting from increased penetration of the Facebook and Twitter domains. The interesting aspect will be the revenue they will eventually derive from Facebook and Twitter for use of their stories. I am expecting the media groups to profit from sharing of media stories. See http://www.google.com/finance?q=ASX:FXJ. They will eventually realise they should be allowing you to share content, and to benefit from sharing that content.

3. Harvey Norman (ASX:HVN): The chart is less impressive to me, probably because they trade off higher priced, higher margin products, and that is not attractive in this internet-based revolution, so whilst earnings might recover in a strong Australian market, I think they will lose market share. So less attracted by this stock, and that is reflected in a less appealing chart trend. See http://www.google.com/finance?q=ASX:HVN.

4. News Corporation (ASX:NWS) - The Sydney Morning Herald is recommending media stocks to its readers. Does it not see a conflict of interest there? The stock is even trending down. Maybe that is why it feels compelled to recommend Fairfax. Anyway, we would be looking for signs of support in this stock before we signed on. See http://www.google.com/finance?q=ASX:NWS. I trust I am matching the right paper to the right group. I guess the problem for News Corp is its exposure to the weaker US and European market. So I would look for downside to that magical $10 support it always seems to go for. In the meantime, I'd go for Fairfax for media exposure.

5. Sims Metal Management (ASX:SGM) - This is a great stock, but this does not appear to be the time to buy them. I guess the problem is a shortage of scrap, but I must confess I do not know the dynamics of the industry. See http://www.google.com/finance?q=ASX:SGM.

6. Salamat Group (ASX:SLM): I actually know something about this group because of my partner's background in the call centre market. The stock has already recovered, and I don't have such a positive view of the industry, as I see people relying more upon online support, people being prepared to use more online support, and the outsourcing of business to offshore call centres, where they will see margins fall. Interesting they use Malaysia as a call-centre base. In this respect they will probably confront higher staff turnover than in the Philippines, as well as a smaller population base. They will have a better work ethic than Filipinos, however Filipinos are more personable, and I think provides a more sustainable call centre base. See http://www.google.com/finance?q=ASX:SLM. This stock I think will not yield much growth, but more likely trading volatility, in which case, you have missed the move already.

7. UGL Limited (ASX:UGL): I like engineering contractors like UGL, and the chart has some appeal, as I think we are destined to see a breakout. Resolution of the election will likely give greater comfort to investors that the company will be able to book more project contracts in future, so I can see this stock breaking resistance, but I would watch for confirmation of a positive trend, as I don't know the market position of this stock. See http://www.google.com/finance?q=ASX:UGL.

SMH also recommended some gold stocks, though I don't like the top end of the mining market. See my speculators blog.

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Andrew Sheldon www.sheldonthinks.com

Vector Energy (VCT.NZD) - break out

I actually didn't pick this stock up sooner, but in any respect Vector Energy in NZ has staged a break out, then fallen back to support (consolidating the move), and is now in an uptrend. This is of course a stock you could buy. I prefer the hydropower exposure, however the chart looks good. The reality is that all power companies in NZ are never going to have their precious margins questioned. The idea that NZ is a deregulated market is not in question. What is apparent is the uncompetitive market stucture which was put in place to guarantee NZ's paid taxes in the form of higher electricity prices, as opposed to taxes. All their profits when to investment bankers. Its a great scam if you get your share of the pie. I might add, Victoria (Australia) ran the same scam when they privatised their electricity assets. In the meantime, CEOs are giving themselves huge bonuses. Before they were accountable to the government....now....oh its the market....pricing signals...supply and demand :(

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Andrew Sheldon www.sheldonthinks.com

Aquarius Platinum (AQP:LSE)

There is some temptation to buy Aquarius Platinum (AQP) given the current strength in platinum prices. The problem of course is that I think this stock will under-perform as long as the broader commodities market is strong. There will come a time when copper, vanadium and other commodities which we associate with South Africa, get sold off. Until such time, I would expect AQP earnings to be effected by the strong Rand, as well as disruptions to mine production, which have just been resolved. The outlook for this company will otherwise be good as precious metals prices rise.

The chart also looks good, though I think I'd be looking for a market entry closer to support. We can see the previous resistance provides a line of support at 318 pounds.
You can buy this stock in Australia as well, as I did many years ago at 80c, but the chart is different. Its probably listed in South Africa too.

Andrew Sheldon www.sheldonthinks.com

Xero - accounting services (NZX:XRO)

I have not been watching blue chip stocks lately, though my suggested KDDI in Japan is doing well. I have come across a NZ stock which I think requires some attention. The NZSX is a relatively small exchange so good stories tend to slip past people. The stock is by no means a blue chip, but it could be. I note that the founders of MYOB haved taken a significant stake in the business. It is only capitalised at $123mil, but its quickly expanding globally, and it seems to be on top of its costs now, with still $23 million in cash.
The company has developed an online accounting solution for small-medium sized businesses (SMEs). I think its a great solution given the ease of taking your accounts on the road with you, the opportunity and desire to see your latest results on the go, and the ability to show people your latest financials. I also believe we will see in future corporate accounting become 'continuous' in the sense that you will have period reporting only for the purpose of comparison. We will not wait for quarterly results, we will want dynamic data for sales, etc. Maybe these will be processed straight away too, i.e. Straight thru processing. This is the future, but these guys seem to be well along this path. This is a big market, and I think this group will seize a part of it.
See their review and latest 6 monthly interim result.
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Andrew Sheldon www.sheldonthinks.com

KDDI about to reach previous low

KDDI is close to returning to its previous low, making it another great opportunity to pick up the stock at a very reasonable buy price. We recommended this stock last time it bottomed, and the current 'double bottom' offers another compelling opportunity to buy this stock. We expect a turnaround in earnings in years to come as they streamline costs. KDDI is the 2nd biggest cell phone seller and network operator in Japan after NTT Docomo.
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Andrew Sheldon www.sheldonthinks.com

KDDI doing well

Five weeks ago we suggested an investment in KDDI in Japan. This mobile phone operator is the 2nd biggest cellphone network provider in the country. Five weeks ago we recommended at Y442, its reached a high since then of Y525. The stock remains in a downtrend, though I believe it is going higher at some point. It may fall back to the Y419 support, though this stock is due for a breakout some time. It has already made a double bottom, for this reason I would be hanging on for bigger gains despite weakness in the broader equity market.
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Andrew Sheldon www.sheldonthinks.com

KDDI - Is this a turnaround story?

For investors who use the CFD platform of CMC Markets, you might be interested in this stock from Japan. KDDI is the 2nd largest mobile phone service provider in Japan. The company has been undergoing a slow restructuring. The company I believe has a lot of debt, thought I don't see it going broke. Rather I would not be surprised to see it perform a wonderous turn-around for two reasons:

1. Rationalisation of services - the company has acquired an agglomeration of brands and cell phone standards. Its task is to get customers onto a single standard. These brands include Tuka (which I used to use), AU and PHS.
2. Expanded sales - I would expect KDDI to benefit from cut backs in customer expenditure. I envisage that customers will shift to lower cost plans, i.e. pre-paid options, particularly students and single people.
3. Persistence of low interest rates should allow them to make in-roads
4. Investor (Vodafone? re-entry) or capital raising

Its competition is Docomo, which has always offered a premium & family service. I think Vodafone is the most likely company to enter the market. It has previously sold out of Japan, having sold to Softbank, but I would not be surprised to see it re-enter the market given its experience in Japan, and because of the large market share it will acquire. Anyway, I watch this stock with interest because their share price has sunk back to previous lows.
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Andrew Sheldon www.sheldonthinks.com

Aquarius Platinum - watch for new highs

Aquarius Platinum has been doing very well of late after having recommended them at $2.60 about 6-7 months ago. I would be taking a look as they test a previous resistance level. My concern is that they will fall back in the light of current SIV fears. I would wait for market direction on this issue. One must remember that this is a very volatile stock, so one needs to react quickly to any technical signal. Refer to the attached chart - you are looking for a break out to a new high, or a fall below the previous low. The outlook for platinum is very good - both because its a monetary asset and because of its application in fuel cells, but that is long term. In the short term, I believe they are expanding output and cutting costs.

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Andrew Sheldon www.sheldonthinks.com

Australian Agricultural Company (AAC.ASX)

Once again we are at a place where Australian Agricultural Company not only becomes a good buy, but I would suggest to you its a probable takeover target. I'm not altogether sure a takeover would succeed however. Why? For two reasons:

1. Its the only public company in Australia
2. I think its the largest private owner of land in Australia - so I can't see that passing to foreign hands
I have already sung the praises of this company, so I'd be inclined to just refer to those. Once again its a timely entry. Food prices will move up, and this company will continue to benefit from strong beef demand in Asia, and I would suggest from a free trade agreement with ASEAN countries. It will even benefit from climate change, as northern Australia is experiencing more rain.
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Andrew Sheldon www.sheldonthinks.com

Futuris Corporation (FCL) - buy

Futuris Corp is one of my dad's old favourite companies. In actual fact this is precisely the type of company that is good to buy in these times because it is a large company with good exposure to the rural Australian economy. There are several reasons why we should be excited about that:

1. Commodity prices might have collapsed, but food prices will hold up better, and the $A has collapsed as well so $US receipts from commodities will translate into a lot of $A. That is good for farmers.
2. I would also expect the rural sector to benefit from infrastructure projects in rural areas. Nation building projects.
Aside from these points - the stock has reached a low point. Looking at the chart, we can see a hang-man candle pattern, which to my mind is a signal to re-enter this stock.
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Andrew Sheldon www.sheldonthinks.com

Commonwealth Bank (CBA.ASX) - support $20-22

The Commonwealth Bank of Australia (CBA) is another bank which has plummeted to lows. I can actually see it finding support soon - around $20-22/share. I'd be inclined to place an order around $20 because I think it will reach those levels during intra-day trading and recover to $22-23 level.
Historically the stock has proven strong resistance at $35/share, however is this market I would be surprised to see it exceed $30/share.

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Andrew Sheldon www.sheldonthinks.com