28/01/2016: What stocks to buy if you have some spare cash

Scott Schuberg: Good afternoon members, welcome Rivkin Virtually Live Local, for Thursday the 28th of January. I'm Scott Schuberg joined by Shannon Rivkin.

Shannon Rivkin: Hi Scott.

Scott Schuberg: Hello mate.

Shannon Rivkin: How are you?

Scott Schuberg: Very well thank you. A reminder to everybody, this show contains general advice only. Okay we'll get into the questions. Steven from New South Wales, I have a little spare cash at present. We're all very jealous, Steven. The market seems pretty attractive in terms of overall pricing, just wondering what you might recommend in terms of attractive propositions. Obvious prospects are the banks and the bottomed out resource stocks. I have some RIO and some Woodside Petroleum and a bit of BHP. I have more ANZ and Westpac than I have NAB and I have no CBA. Are there any other gems that deserve our attention?

Shannon Rivkin: Throw a dart at the ASX 50 and you could probably say that they're all at long term cheap levels on P/E basis and dividend yield basis. Probably on the resources, I will say that as much as we continue to say that we think that there's good value there, it is obviously dependent on what commodity prices end up doing. You know, I don't think anyone can accurately say they know what the oil price is going to do, what the iron ore price is going to do, because it's probably the downsize has exceeded everyone's expectations.

If oil goes to $10 and iron ore goes to $20, I can't say that RIO is going to be cheap or the BHP is going to be cheap, so just keep that in mind, to really see good upside in those stocks, you're going to have to see those commodities bottom and start to see higher levels. The one thing I'll say is,  when giving advice about stocks, I like to guide you towards a strategy, so buying a stock in a vacuum is a little bit of a risk for me because if things don't go your way, you're going to be buying more of it, you're going to be selling it.

Which is why I continue to like the blue chip portfolio because it's a really nice way to have a portfolio, to know exactly what you're going to be doing with it and it pays a high dividend yield, which is handy in a market like this as well. That's probably what I would push you towards doing. If you've got a little bit of spare cash and you just want to play some, I can't really pick a favourite right now.

Scott Schuberg: Let's just run through a few anyway, if Steven's just after a few names, like Sun Corp and IAG are both sort of sitting around the bottom of the blue chip area. Do you have any issues with the environment for insurance?

Shannon Rivkin: No I don't and probably IAG after what they announced as far as backing out of China, probably a positive risk of maybe capital return there is they can't identify anything to do with that cash, which I think will be very well received in this market and certainly for yield hungry investors, that's going to be handy.

Scott Schuberg: Any issues with WES? I was just looking at, I don't really like Woolworths, they're against the ropes at the moment, still no CEO. They've got to divest Masters. They'll probably end up selling everything at the wrong time because they're just on a bad run of luck and really they've got no driver in the driver's seat. I guess as a bit of a relative value thing, both Woolworths and WES are okay as far as dividend yield and the reason why we do focus on dividend yield a lot is because these sound like set and forget holdings for you, Steven, to an extent. You know, low maintenance part of your portfolio and having a high dividend yield is just evidence that they have steady earnings and the ability to pay out to shareholders while still hopefully being able to grow their businesses. It's a good simple measure.

Shannon Rivkin: I might just jump in and say, I agree with you on Woolworths in the short term, because yeah, it's a big headache that they don't have the right CEO yet. It's a big headache that they're selling an asset probably at the worst possible time, but just the value in that business that could be unlocked with no distraction, all that capital assuming they come back, but also the capital was planned to be spent on it. If they can fix the main business that is under-performing so much.

Scott Schuberg: How would they do it?

Shannon Rivkin: Well they need the right CEO and they need to allocate a hell of a lot of capital at it. All of a sudden if they do that and if they maybe sell Big W as well, just alone if they can turn that business around. I'm not saying they can, but you know, these are the same criticisms that Wesfarmers received when they bought Coles. No one thought they'd be able to do it, they hired the right guy and they threw enough cash at it and they got it right. As I said, I'm not saying that Woolworths is going to get it right, but if they do get it right, I think the upside is significant. On the risk/reward long term basis, I actually do like it. On a short term basis though, I think it's going to be directionless. I'm with you there.

Scott Schuberg: Yeah, I was chatting to one of the other guys in the office this morning who's negative on Woolworths, and chiefly because it's a relatively high margin business in that space competing with a lot of foreign competitors who are coming in selling stuff in bulk. It's probably going to be, like if you look at the UK model, when Tesco took market share from Waitrose and Sainsburys who are more upmarket supermarkets, you know, they did incredibly well and the others suffered and Woolworths is kind of in that premium space.

We don't have a identical hierarchy to what exists in the UK but I think it's a decent enough analogy to say that they'll struggle maintaining the margins that they have presently when there are a lower cost alternatives who are becoming more popular and who'll be quite aggressive. Aldi is actually a privately owned business, and can probably afford to take the kind of decisions and risks without pandering to shareholders.

 Woolworths is in a horrible position right now because they've got shareholders that are absolutely pissed at them and they're screaming, find me a CEO, get rid of Masters, turn this thing around and you got one chairman who's kind of speaking for the entire business at the moment and it's very difficult because he's not thinking about how am I going to make these shareholders good returns in the next five years, obviously part of his brain will be but he'll be distracted by the fact that they've got shareholders just screaming at him right now.

They'll have to take some short term decisions, but the short term decisions will not be perfect. They'll probably end up selling things at the wrong price and trying to figure out what their strategy is for earnings growth at the same time, which will be difficult for them. I mentioned Woolworths and Wesfarmers because they're both yielding around the similar kind of level as far as dividend yield but if you're looking at both of them, I'd probably pick Wesfarmers. I kind of like Macquarie.

Shannon Rivkin: Your next one is definitely one that I probably should have said, because if you're the view that the market's low and I think we all are, and all of the view, certainly in the long term it's going to see significantly higher levels. Then FGX is a perfect one. Yeah, Scott's put that in there and I guess the reason he's probably put that in there is because you're looking at a lot of these LICs recently, certainly at the higher quality managers, they're usually at or above NTA and FGX is probably because they invest in Australia.

A little bit of a stark contrast because their performance has been really good. At the last NTA at the end of December was almost $1.20 and they continue to trend around $1.14. Yes, January's been weak but they've shown a great track record without performing so I'm sure they've outperformed throughout January and still at a discount.

Scott Schuberg: Yeah, and I think structurally there's a race on, I think for, listed investment companies have been quite trendy, very easy for self-managed super funds to buy and I think across the kind of family of Wilson, Listed investment companies is about 65 per cent of their shareholder registry are self-managed super funds, so whatever's in vogue for those super funds will do well. Super funds are notoriously under-invested, well I won't say under-invested, but they don't have many investments in foreign equities so a lot of the global listed investment companies with exposures to markets in Europe and US and Asia having been trading at premiums because SMSFs are like “okay, well I need more global stuff in my portfolio”, whereas the local ones that hasn't been so much the case.

When Shannon talks about the net tangible asset backing up FGX and trading at a discount, that can be cyclical but at the moment is not necessarily the norm for a good manager. It's a good opportunity to buy. For those people that have existing holdings of FGX, remember you have that free option to exercise so don't go loading up more because you can exercise that option at any time, up until September next year if you want more stock. They'll still need to build their franking account as well as their earnings for dividends and get a steady ratio going each year, but for the moment it's not going to be yielding it's head off.

It's still one to buy in as a good managed fund exposure, but know that the directors of that business are aware that they've got to please their SMSF shareholders, so they will be focusing on getting franked yields to those shareholders. I want to mention NABHA.

Shannon Rivkin: Yeah, well this is a kind of a little bit of a symptom of the market as well. NABHA were in there obviously for a very mediocre yield but still a yield worth paying attention to but more importantly, the chance that they'll potentially redeem these because no longer attractive as far as how they classify with the ratings agencies. Right now, I think the market's discounting these sort of ones because the market's looking at everything and saying, well it's capital preservation month so no one's going to start allocating any of their capital to unnecessary expenditures but long term, at least while we're awaiting on the NABHAs you will get paid for that.

Once things start to normalise and they kind of start to say, well can we clean up this balance sheet a little bit outside of just these big capital raisings and some of the bigger decisions, I think they can start to look at that one again. Yeah, as a long term hold, I think that's a really good one as well.

Scott Schuberg: All right, so just to sum up, IAG we quite like. If you have to own one, Wesfarmers probably over Woolworths, that's my opinion but just kind of via that discussion we had. Like I said, I quite like Macquarie just because it's relatively cheap. For a company that has a history of being able to give it's earnings per share little boosts every now and then, it's not expensive at the moment and has the ability to get more aggressive with growth. NABHA, which is a NAB hybrid. It's on a yield of 6 per cent at the moment. As a parking spot, that's great because there's potential for it to be redeemed but be prepared to be a long term holder if it doesn't.

FGX, which is a future generation fund, the one we've talked about where you've got a one per cent donation fee. There's no other management or performance fee, so it's a very cheap lick as far as expense ratios and management fees are concerned, so it's a good one to buy and hold and not worry about too much.

 

Complex product warning

This article contains information about hybrid securities, which are considered complex financial products. Please click here to read the ASX's "Understanding Hybrid Securities" document before considering an investment in hybrid securities. 
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