It seems that again our method for choosing high conviction stocks within each sector has paid off. In our last review of the industrials sector on 18 December 2012, the three biggest stocks with a suitable consensus recommendation of 2.5 or better (with 1 being a buy and 5 a sell) were Transurban, Aurizon and Asciano.
As can be seen from Table 1, their capital gains over the last six months or so were 10.4%, 17.7% and 8.9% respectively. While not stunning returns, they each easily beat the sector’s gain of 5.2%, and the broader index return of 5.6%. Seek was the top performer, but its recommendation of 2.58 just missed the cut and its size also put it out of contention.
[1]Asciano had its recommendation improve from 2.07 to 1.80 over the period but the ratings for Transurban (2.38 to 2.70) and Aurizon (2.33 to 2.60) slipped under the radar. These deteriorations in rankings are not enough to disqualify them from a hold but they are no longer all buys. The new top three buys are Asciano, Qantas and Downer EDI, although I personally would never touch an airline. Given that this sector is not large by market capitalisation as a share of the ASX 200 index at 5.8%, two stocks would probably be enough for most high conviction portfolios.
The relative prospects for the sector can be deduced from Table 2. With an exuberance read of -5.6%, the sector is cheap and the prospective capital gains are not bad at 12.4% over the coming 12 months, giving an adjusted forecast gain of 19.0%. The forecast yield of 4.4% is not bad either. These statistics, combined with the tumbling Aussie dollar, make the sector a little more attractive than it was a few months ago.
With the increased volatility in the market over recent times from the discussions about tapering QE3 and the China credit squeeze, extra care should be taken when entering the market. As is often the case, dollar-cost averaging – or breaking the total intended investment in a stock into several smaller parcels – might be the way to go – depending on the size of the total investment.
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Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: CBA – a contrarian’s play? [3]
- James Dunn: Small-cap options – WAM and Mirrabooka [4]
- Margaret Lomas: Seven property essentials for the New Year [5]
- Fundie’s Favourite: Platypus Asset Management on Sirtex (SRX) [6]
- Question of the week: Franking credits [7]