Source: Wealth Creator Magazine Sep/Oct 2006

Back testing on the stockmarket

In the Stockmarket I can 'Back test' any share trading strategy that I am interested in and, by testing and measuring its outcomes on paper, I can validate and optimise its performance before committing cash to it.
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Sector Success

Source: Wealth Creator Magazine Sep/Oct 2006

Retail, media and resources sectors

Wealth Creator talks to three of the country's leading sector experts about what to expect in the retail, media and resources sectors in the new financial year. We also find out which stocks to look out for.

Craig Woolford Citigroup. Retail Sector

Craig has been an investment analyst for over six years.  He specialises in the Retail sector analysing the major supermarket and discretionary retailers in Australia. Craig's previous experience includes equity product development and funds management. Craig is a Chartered Financial Analyst.


WCM: What has been the trend in the sector over the past 12 months?
Craig Woolford: There have been some standout performers, in particular, Just Group and Harvey Norman. Both have been very strong performers in the last 12 months. The strength is very company specific, with Just Group there has been a return to their strength in supply chain management and for Harvey Norman, a recovery of margins across a number of its business divisions and continued growth in market share.

WCM: Obviously, there have been interest rate rises and petrol price rises, have these had an effect at all?
CW: The macro economic environment is neutral to slightly positive. We do have pressures coming from higher interest rates and much higher petrol prices, however, on the positive side we've had tax cuts from last year that were quite significant, strong income growth beyond those tax cuts and in addition to that we also have low unemployment. So the macro conditions are actually quite favourable for around trend-level growth. What we saw over 2005 was a reduction in retail spending, a big impact on sentiment around the time of the petrol price spike in October and then, since that low point, a gradual acceleration in retail sales.

WCM: The market as it stands today is obviously fairly solid; are you looking for further growth?
CW: Overall, retail spending remains around trend-level but then within segments of the retail market you do have winners and losers. At the moment, department store sales growth remains fairly weak. I allude to the discount department stores like K-Mart, Target and Big W. Clothing is reasonably soft, I think weather conditions are having an impact there, but electronics retailing is extremely strong.

WCM: Is that due to the World Cup and similar events?
CW: The World Cup has had a big impact but interestingly, whitegoods spending has increased quite significantly for instance air conditioner and refrigeration sales have improved. Weather conditions have helped there but stronger product innovation in those categories seems to be supporting faster sales growth.

WCM: If somebody was to invest in the retail sector, what should they look out for?
CW: The first thing in the retail sector is looking for business that provides an opportunity to grow in store numbers; a very strong concept that can open stores. You're  looking for a business that's in the right categories of retailing, likely to sustain high growth in the medium term and more importantly we're seeing, with the number of companies, you need a business that has a very strong focus on supply chain management - keeping a tight control over inventories.

WCM: Are you expecting any changes in the market?
CW: Well from the macro side, I expect a slight acceleration in retail spending towards Christmas for the sector. What we've seen across the share market over the last 12 or 18 months has been acquisition activity - we may see further activity on that front, both retailers as acquirers and as targets. Opportunities may emerge in the sector.

WCM: Is the retail sector good for short-term or long-term investment?
CW: What's important in retail is to have confidence in the management of the business. If you do have confidence in the management then quite clearly the right retailer gives you a great long-term investment.

WCM: Who are the companies to look out for?
CW: Harvey Norman, Just Group, Metcash, Woolworths.
Charles Hyde Commsec. Media Sector
Charles is CommSec's equity strategist.  He previously held the role of Senior Consumer Staples Analyst. Prior to this, Charles worked for a number of years as an academic economist with a specialisation in industrial organisation at Melbourne University and the University of British Columbia.

WCM: What has been the trend in the past 12 months?
Charles Hyde: The media sector has delivered no growth over the past year, in fact finishing down 0.1%. The sector has been weighed down by soft advertising spending and an emerging view that the mooted legislative changes to eliminate cross-ownership and foreign ownership restrictions are less likely to proceed any time soon.  

A change in tack by the ACCC in how it will assess media mergers has also possibly been a negative for the sector, as it might make it more difficult to get regulatory sign-off on some mergers. The aggressive drive by Seven to build its ratings over the past year has also signalled an intensification of competition. This means that TV costs are likely to rise and narrower margins will result.
WCM: So who have been the best and worst performers?
CH: The best performers in the sector were:
  • Seek Limited +124.8%
  • Austar United +23.0%   
  • PBL +22.2%
  • Seven Network +17.4% WAN  +9.3%
  • The worst performers were: Ten Network Holdings -25.9%
  • Fairfax (John) -14.7%
  • Southern Cross Broadcasting -14.2% Macquarie Communications -5.9% APN News & Media -1.8%

WCM: Are you expecting any changes in the market?
CH: CommSec has a neutral outlook on the media sector.  There is no clear sign that the Federal Government will move on deregulating the media industry anytime soon. This lack of action will tend to weigh down on the sector. On the other hand, we believe that retail spending will continue its rebound - due to generous tax cuts and continued strength in the labour market. This will flow through into a stronger advertising market.WCM: Who are the companies to look out for?
CH: Those stocks exposed to Internet advertising, which is taking share from newspaper classifieds, will outperform the rest of the sector. This includes PBL and Seek. We expect Ten to perform substantially better than it has in the past due to controlling its costs better than its peers.The stocks most likely to benefit from any takeover activity in the wake of deregulation are Fairfax, SBC and WAN. Our preferred stocks in the sector are Ten and PBL

Damian Graham Macquarie - Resources

Damian Graham joined Macquarie Private Portfolio Management (MPPM) five years ago and has been responsible for overall business development. He has a Bachelor in Economics (Hons), a Graduate Diplomas in Applied Finance and a Chartered Financial Analyst qualification.  

WCM: What stocks make up the Resources sector?
Damian Graham: The resource sector can be broken down fairly broadly into mining stocks and oil and gas stocks. We typically bundle energy together. Certainly in the mining sector there's a predominance by the large diversified mines, BHP and Rio Tinto mainly. Then you move down to the second-tiers, the Aluminas and those sorts of companies which are in the mid caps section and are more related to single commodities or dual commodity type players versus the diversifieds which have exposure across most of the major commodities.

WCM: How has the market performed in the last 12 months?
DG: In the Australian market, if you look at it across the resource sector, you've got a very significant weighting to someone like a BHP. So we look at the overall allocation of the mining sector, say it's 20% of the ASX, BHP is around a third of that 20%, so it's a very significant proportion of that overall allocation. Obviously Rio Tinto's important, Woodside's important, and then it breaks down to smaller allocations across some of the medium sized companies like Allumina, Oxiana, etc.

Not surprisingly, over the last 12 months it's been a very, very strong period and we can extend that back a couple of years where we've seen the mining companies really respond, share price wise, to what's been happening with regard to global growth. We saw a really strong bounce in global growth, particularly in the US, of around 5% in 2004 and 4.5% in 2005. We've seen it trending down recently and we're predicting around a touch under 4% this year.

Global growth has been impacted by this down trend and also the strong growth rates and forecast rates for China. There are a significant number of factors, but what we really are seeing, and this relates to performance and obviously increased volatility in the resource sector, is some of the dynamics that are driving those global growth rates across countries which are maturing a little bit and hence we're seeing some policy responses which are leading to some increased nervousness for investors and obviously increased volatility.

WCM: So in comparison to other sectors where do resources sit?
DG: I think it comes back down to your view on global growth, supply and demand, and how important China's going to be in the future. It's interesting that although the Chinese government appears to be very focused on slowing growth down, they haven't had a huge amount of success in doing that in the shorter term. So assuming that they have a fairly soft landing in the slowing of that economic growth rate, I think commodities have a reasonably strong five year picture.
 
WCM: We are talking a better long-term investment than a short-term investment?
DG: Again you look at a broad spectrum of investment opportunities and the market has had clearly a very strong run over the last two and half years. At the end of that two and a half years you look around and ask, 'What can potentially offer some additional earnings growth?' and I think the resource companies are fairly well placed to do that. I think that even on a 12- to 18-month perspective the resource sector looks pretty attractive.

WCM: Who are the companies to look out for?
DG: At this point of the cycle particularly, you've got to start with the bigger diversified miners, no doubt about that. I think that when you're moving into a falling pricing environment, which we probably are, the broad commodity prices will either stay as they are or trend lower over the next 18 months-to-two years. I think in that environment you've got to have protection across diversification. That's why someone like a BHP, Rio Tinto, Woodside Petroleum, are potentially better placed just from a diversification of assets standpoint.

Again from that perspective I like Oxiana, I think that they're a little bit riskier, but certainly a well run company, a good suite of assets. They don't look cheap, but they have the ability to appreciate in price as they successfully execute their strategy, which is to fill out their gold and copper reserves around the Sepon. This is their main mine in Laos. Next is to continue to benefit from the acquisition they undertook of Golden Grove and hopefully develop Promina Hill successfully, which is their new potential key mine, utilising cash flow they're generating which will be fairly significant looking forward.

 

Craig Woolford

Citigroup. Retail Sector
Craig has been an investment analyst for over six years.  He specialises in the Retail sector analysing the major supermarket and discretionary retailers in Australia. Craig’s previous experience includes equity product development and funds management. Craig is a Chartered Financial Analyst.

Charles Hyde

Commsec. Media Sector
Charles is CommSec’s equity strategist.  He previously held the role of Senior Consumer Staples Analyst. Prior to this, Charles worked for a number of years as an academic economist with a specialisation in industrial organisation at Melbourne University and the University of British Columbia.

Damian Graham

Macquarie – Resources
Damian Graham joined Macquarie Private Portfolio Management (MPPM) five years ago
and has been responsible for overall business development. He has a Bachelor in Economics (Hons), a Graduate Diplomas in Applied Finance and a Chartered Financial Analyst qualification.