Chris Wright, the editor
of Smart Money in the Australia interviewed Professor John
Price for an article he was writing on looking for value
in the current Australian market. Below is a transcript
of the article. (20 September 2003, Pages 41, 42, 43)
Want to join the share surge but afraid there's
nothing left worth buying? Here's where the experts see
Does this sound like you? You've invested
in shares before, but for the past year or so you've been
out of the market, fed up with being battered by losses
and unpredictable market swings. Over the past six months,
you've seen share prices climb and climb, and you're finally
convinced that things are on the mend and prepared to invest
again. But now you're worried you've missed the boat and
that the latest big rally could come to an end the moment
you buy back in. Fund flow data from research houses such
as Assirt and InTech suggests that many people did pull
money out of equities at the start of this year, and are
only just beginning to put it back in again now a sad state
of affairs since those people have missed out on a 20 per
cent rally, but there it is.
If you're in this camp, then there are two
questions you ought to ask before wading back in. One is:
is the rally at an end and the market now overvalued again,
ready to fall once more? And second: which specific stocks
still look like good investments today?
To find out, we asked a group of investment
specialists a mixture of fund managers, consultants and
researchers and distilled their thoughts.
CATHERINE ALLFREY, Colonial First
An equities portfolio manager for the largest
funds manager in Australia, Allfrey thinks there is more
to come from the market rally. ``There are two reasons.
We have just had the best reporting season since 1999 in
terms of earnings upgrades. The other is the global economy:
Japan with record GDP, continuing strong growth from China
and now the US recovery as well."
Domestically, Allfrey thinks the jobless numbers
were also good news and notes retail companies expect a
In terms of specific stocks, Allfrey highlights
three that have lagged the market rally but still offer
good growth prospects: James Hardie, Westfield and Woolworths.
In addition, she says analysts always underestimate
the upside in earnings coming out of a cycle low. Applying
this logic to media, she highlights Publishing & Broadcasting
Ltd. ``It had much better than expected results, plus the
market upgraded its earnings, plus I think there's more
Allfrey also highlights Macquarie Bank, given
the operating leverage it ought to gain from increasing
mergers and acquisitions and initial public offering activity.
``We could see strong double-digit growth for Macquarie
in the next couple of years."
Finally she highlights two smaller caps: Flight
Centre and Transfield Services . Although most aviation-connected
businesses (Qantas excepted) have bounced well after the
severe acute respiratory syndrome and the war in Iraq, Flight
Centre has lagged, and its 30 per cent increase in shops
last financial year hasn't yet come through in terms of
earnings. It will benefit from people returning to travel.
And Transfield? ``Because 90 per cent of their revenue is
already contracted for 2004, and they're still winning more
ERIC METANOMSKI, MMC Asset Management
``It's way overcooked," says Metanomski,
principal of Adelaide-based fund manager MMC, of the rising
market. ``The maniacs are back; the day traders are back;
there's a bunch of crap in the markets that goes up every
day regardless, and we're back to a situation where the
less you know about stocks the better off you are, because
if you knew more about them you wouldn't invest in them
in the first place.
``The same alarm bells that should have been
ringing a year and a half ago are ringing again."
Metanomski, as the astute reader might infer
from his opening remarks, is somewhat cynical about valuations
in the Australian stockmarket. And he should know: his MMC
Value Growth Fund has boasted some of the best returns in
the market in recent years, returning 22.2 per cent annualised
over the 10 years to June 30, by a strict value methodology
that mirrors a lot of the principles often associated with
Warren Buffett .
His value system is struggling because he
can't find much that's reasonably priced. ``I'm finding
it unbelievably hard to find good value," he says,
on his mobile phone while tramping Sydney's streets looking
for investment opportunities. ``Some of the people I'm seeing
are good companies, you bet your boots they are. But the
prices are starting to discount for the next two or three
years and there's too many variables that can intervene
for that to make sense. Any prudent investor has got to
be very careful about looking too far forward."
Within his own portfolio, Metanomski says
he has many core holdings he believes are great long-term
prospects but doubts they have much share price growth in
them in the short term because they've already grown.
Any exceptions? He names just two: Record
Realty and Nufarm . ``And we've been looking at a lot of
the third-tier telcos, but the more we dig the more nervous
PAUL XIRADIS, Ausbil Dexia
Xiradis, an Ausbil Dexia director, manages
$1.2 billion in Australian equities. ``We're certainly of
the view that there is still momentum in the markets,"
Xiradis says. Ausbil has a 3350 to 3400 target for the stock
exchange in June 2004 and, since it closed at 3099 in June
2003, that suggests a 10 per cent rise in the markets. ``Investors
could get a return in the order of 14 to 15 per cent for
the year," he says.
Xiradis is wary about recommending specific
stocks, though he does say that Toll Holdings has got a
good deal in its proposed Tranz Rail acquisition, if it
goes through. In terms of sectors, he believes banks are
protected by their strong yields and that following a period
of underperformance could do well in the lead up to their
results. ``There's a bit of value to be had in the run-up,"
he says. He notes, though, that some banks have overhanging
issues NAB's intentions towards AMP, ANZ's in New Zealand,
and Commonwealth's soon-to-be announced broader strategic
plans which suggests Westpac and St George Bank stand out
for being in a good sector without the encumbrance of uncertain
``The insurance sector still looks good despite
a strong run," says Xiradis, who also likes healthcare
following a strong bounceback in earnings. Mayne will look
interesting if it sells off its underperforming hospital
Xiradis thinks resources look strong, too.
``We are entering a period where growth should improve,
driven by the really aggressive stance that has been taken
in getting the US economy to grow." If the US economy
improves, and with it manufacturing and employment, resources
demand should follow.
TOM COTTAM , van Eyk Research
As the head of investment research, Cottam
runs the model portfolios for van Eyk, which have become
the basis of several independently managed accounts that
will soon form the basis of a listed investment company.
``We hate trying to make predictions of where
the market will go, but I actually believe there is scope
for the rally to continue," he says. ``It wouldn't
surprise me if there was a correction at some point in the
not-too-distant future, but in terms of valuation there
is still more to come from the rally."
Longer term, Cottam thinks the rate of return
will be in single-digit terms, punctuated with sharp rallies
How big a correction? ``If bonds went up in
terms of yield, depending on the extent of that, you could
conceivably see a very big correction," he says. ``We're
not expecting bond yields to go up dramatically, so any
possible correction might be limited, but the risk is always
there." Names in the various van Eyk model portfolios
include Simsmetal, QBE, Mayne, Leighton Holdings , Toll
Holdings , Lion Nathan and unusually Fairfax. ``That's a
slightly contentious one because there aren't many people
finding it favourable these days.
``If you wanted a sector, we could generally
say that the retailing group looks attractive," Cottam
says. ``Coles and Woolies, and one could include with it
Metcash and, for those who want income, David Jones."
Among banks he prefers Westpac and thinks
ANZ looks OK, but not Commonwealth. He likes SunCorp Metway,
and thinks Orica and Lend Lease look interesting. Finally,
among small caps, he highlights Portman Mining, particularly
following its recent permission to mine a new area of Australia.
``It probably comes in as one of the more attractive resource
stocks at the moment."
PROFESSOR JOHN PRICE, Conscious Investor
Professor Price developed a software package
for investors mirroring the investment strategies of Warren
Buffett. He believes in long-term investment the long, long
term. He draws the analogy of buying a stock with getting
married: a stock is something you might well stay hitched
to for the rest of your life (or at least 20 years).
That being the case, he doesn't worry too
much about today's valuations, instead looking at some of
the basic competitive advantages of specific companies.
He looks for ``economic moats", which protect the business.
These include brand names like Coca-Cola and Gilette or,
in an Australian context, Westfield Holdings . When Westfield
opens a shopping centre, nobody else dares open one for
Few people would argue that Westfield Holdings
looks cheap on present multiples a price-earnings ratio
of well over 20 but Price's conviction of the management's
strength over-rides that. He believes it's the sort of company
you would want to hold in the long, long term.
Price, and his investment computer program
Conscious Investor , also looks for consistent and high
earnings per share, return on equity and return on capital.
He also only wants to invest in businesses he understands
and he wants you to like the products of the companies you
invest in. That's not just because you, as a consumer, are
in a perfect position to evaluate the quality of products
you buy. ``It also makes you more sensitive to changes,"
he says. ``If you notice the quality of a product deteriorating
and you own shares in the company that makes it, you know
something's wrong, and that in time it will probably be
reflected in the share price."
He says you should only invest in companies
you support. You might make a quick buck out of timing the
gyrations of AMP's share price, but unless you are fully
convinced of the abilities of its management, it wouldn't
make the cut under a Price methodology. ``And investment
should be fun," he says. ``How much fun can it be if
you're always worrying about what might go wrong next?"
Companies Price has applauded as investment
opportunities include household names like ANZ, Harvey Norman,
Flight Centre, Toll Holdings, Cochlear (despite a p/e that
hovers around the 30 times mark!) and Perpetual Trustees
. Smaller names like bull-bar manufacturer ARB also make
ANTON TAGLIAFERRO, Investors Mutual
The investment director for this strongly
performing boutique and Assirt's fund manager of the year
for 2003 says: ``Sentiment towards equity markets has certainly
improved significantly in the last few months and the rally
may go on for a bit longer. But we see many reasons to be
Tagliaferro says much of the recent gains
in markets here and abroad has been driven by liquidity
pumped into the markets by low interest rates and loose
fiscal policy, particularly in the US, which he says has
created some imbalances in economies that will have to be
addressed down the track. Recent policies have improved
confidence and created a consumer spending boom, but the
benefits are not flowing through to Australian (or US for
that matter) manufacturing industries, and are therefore
not creating new jobs, particularly since companies have
to become more competitive to survive.
``Excess liquidity is also leading to the
creation of asset price bubbles," Tagliaferro says.
House prices are at record levels all over the western world
and some stock market bubbles are in evidence, too. ``In
fact the best performing stocks in the last six months have
been some of the least profitable and often most speculative
types of companies" he says. ``In Australia we are
seeing the return of rampant speculation in areas such as
biotech stocks." He uses the example of Ventracor :
yet to be profitable, capitalised at almost $500 million,
and with no sustainable earnings stream yet.
Tagliaferro, like Metanomski, has noticed
the return of the day trader, here and on Nasdaq. ``The
proper foundations do not yet appear to be in place for
a sustained bull market. In fact the current rally appears
more liquidity driven than fundamentally driven."
Nevertheless, Tagliaferro says IML is keen
to buy companies that can generate reliable earnings and
cash flow in almost any conditions. In this camp are Transurban
, AGL, Lion Nathan and the banks shares that ``have actually
fallen in the current rally as many large investors trip
over themselves buying into higher risk areas of equity
markets such as the Nasdaq, the resources sector or other
PETER CONSTABLE, AM Constable
The principal of the firm, consistently among
the Top 3 retail managed funds in recent years, says: ``The
market has got a little bit ahead of itself." He believes
the market was cheap in February and March, has climbed
on the back of solid profits, then reached fair value and
overshot. A lot of cash on the sidelines has been forced
into the market, Constable says, creating an environment
in which ``people are chasing shares again, the upshot of
which is several billion dollars worth of floats coming
``I don't think the market wants to pay what
it's paying, but sometimes when you want to put cash to
work you've got to pay what the supply and demand characteristics
are in the market."
There are a handful of stocks, though, where
Constable continues to see value. One is Health Communication
Network . ``We think it's still reasonable value. It's doubled
in the last six months, but it is on a strong earnings recovery,
and we are still buying at these levels." Another is
Chiquita Brands South Pacific , and a third Record Investments
, provided it's held over the long term ``we think that's
got 20 to 25 per cent in it over the next 12 months".
He also likes iiNet , the West Australian ISP company that
is raising $30 million to go towards the costs of an acquisition
The biggest name that catches Constable's
eye is Burn Philps, despite a recent disappointing result.
``That presents a bit of a buying opportunity. It's fallen
25 per cent since its highs of a few weeks ago and we think
it's outstanding long-term value."
Of upcoming floats, he's most interested in
EMILIO GONZALEZ, Perpetual Investments.
Gonzalez, who heads investment for one of
the largest managers, believes the six month rally has been
justified. ``You have to bear in mind we were at a period
around the March quarter this year where every bit of news
was negative," he says. ``We had a lot of pressure
in terms of outlook for the economy, SARS, war the sentiment
was poor and the potential for fundamentals looked poor."
The last six months, he says, have involved
a turnaround not only in sentiment but in outlook: ``a double
swing in the market's favour".
Gonzalez won't recommend individual stocks.
But is he able to find value today? ``Yes, but it's harder.
The companies with strong cashflow, with good dividend policy,
focused on shareholder returns, have been recognised by
the market and have done well, making it harder to find
an element of value."
``The last six months have been something
of a free ride... now you have to be more selective."
MONTHS IN THE MARKETS
|The six months since war
started in Iraq coincided with the strongest bull run
in Australian equities for years. Here's what the market
has done since then.
|Dom mkt cap
|Trades in a month
|Avg daily trades
|Avg trade size 37,000 34,000
|Monthly options contracts
|Proportion of calls/puts*
|*A barometer of confidence
that means many more people have been
betting on the market rising than falling.
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