Discretionary sector – FOX and Crown the pick of the bunch

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While I have not been fond of this sector for quite some time, I did make some assertions in my last review of this sector on 10 January 2013.

History recap

My conclusions were:

“The News Corp (NWS) recommendation was also very good until the second half of last year. But again, it did improve in the last couple of days.”

“Crown Limited (CWN) has the best recommendation but it too has slipped a bit. This looks to be the best of the bunch on recommendations alone.”

“The only stock that interests me in this sector is Flight Centre but today does not seem to be the best time to buy – at least according to broker forecasts of target prices, our measure of exuberance, and the strength of the trend.”

Remember that my high convictions stocks are the largest stocks by market capitalisation, subject to a consensus recommendation of 2.5 or better (where 1 is a buy and 5 is a sell).

On the money

The essence of my hesitation at the time was that the sector was overpriced by 4.8%. It can be noted from Table 1 that Flight Centre not only turned out to be the best performing large cap stock, it did so with a capital gain of 61.5%! Since News Corp split up its business into FOX and NNC, it is difficult to say what an investor might have done in reaction to the split, but FOX was the second best performer at 46.8%. Crown came in at 16.4%, below the sectors’ gain of 22.4% over the same period while the ASX 200 grew by 5.9%.

Note: the estimates in the Table are current to the close of business 22nd July 2013. They are based on Thomson Reuters Datastream.

To the future

Since Fight Centre (FLT) has had its rating cut from 2.18 to 2.58, it now is not a buy as a high conviction stock using my methodology, but it would be reasonable to hold onto the stock while monitoring the recommendation going forward.

There are now only two large cap stocks that pass my filters: Twenty-First Century FOX (FOX) and Crown (CWN) – with a strong preference for FOX – but there are seven small cap stocks that have a good recommendation. Of the small cap stocks, G8 Education (GEM) is the stand-out. It has run hard over the last six months but a ‘perfect 1’ makes it worthy of further consideration.

The sector statistics, presented in Table 2, show that this sector is again overpriced at 3.2%. Its forecast capital gain at 12.6% is just above that for the broader index at 11.6%. While this may not be the best time to buy, the sector is not sufficiently overpriced to be too worried. Dollar-cost averaging might prove to be important. Of course, the dividends for this sector are almost the lowest of all of the sectors. However, the dollar at its new level in the low nineties might be enough to give the sector another boost.
Note: the estimates in the Figure are current to the close of business 22nd July 2013. They are based on Thomson Reuters Datastream and Woodhall Investment Research’s analysis of that data.

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.

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