How my stocks performed this season

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The August reporting season is just about over and the next won’t be until February 2013, with only a few companies, including three big banks, reporting between the main seasons.

So it’s a good time for me to take a month’s holiday. Before I leave, I’m going through my whole portfolio, company by company, to minimise any action I have to take while I am away. And I’ve already arranged for an internet connection so I can keep in touch with my portfolio while overseas.

My defensive stocks

I have four defensive stocks: AGL Energy (AGK), Commonwealth Bank (CBA), Cochlear (COH) and Westpac Bank (WBC).

By my exuberance measures regularly published on my website, the Utilities sector is fairly priced so, although AGK has run hard, I’m not worried. The two banks look strong, but I have this sector as being quite overpriced (but not dangerously so). I would be tempted to take a little profit from my banks if I were to be incommunicado on holiday (particularly if I needed cash for a pension payment), but I’m on hold. If they run much harder while I am away, I might act.

COH (Cochlear) is a favourite of mine. It had a recall for an ear implant late last year when I wrote about it for the Switzer Super Report. It has come back in price, but it’s still not quite to its pre-recall level. Although analysts have it valued at less than its current price and their recommendation is ‘Hold’, I don’t believe them. This is the only stock that I over-rule the analysts. I did a consulting project for them in the late 80’s and have followed them ever since. I did sell some when it got in the $80+ range in early 2011, but I bought back at $55!

So my defensives are covered – at least by my thinking.

My cyclicals

I wrote a fortnight ago about my mining services (Industrials sector) stocks: Bradken (BKN) and Emeco Holdings (EHL). They behaved beautifully (so far) this season. If I had more cash I would average down. I’m at the positive end of the China story, just as I was in late 2008 when these stocks got really hammered. I supported them then, and now.

My Energy sector stocks, Santos (STO) and Woodside (WPL), got hurt in the last little while after so courageously climbing from their Spring 2011 lows. They reported well and I still back them. That leaves my Materials stocks. My one-man jury is naturally deliberating on this issue.

My Materials stocks are Atlas Iron (AGO), BHP Billiton (BHP), Lynas (LYC), Mount Gibson Iron (MGX) and Rio Tinto (RIO). I have no problems with BHP and RIO. There might be a lull in their performance but I bought these stocks on at least a five-year horizon, so a couple of questionable numbers change little for me. I argued very vigorously in the fourth quarter of 2008 and the first quarter of 2009 that China wasn’t going away and backed my stocks. This time China is much stronger. Smaller miners such as AGO, LYC and MGX are a different proposition.

AGO reported yesterday and missed profit estimates, but reported well for the future. I don’t have enough cash in my SMSF to buy more, but I’m sorely tempted to average down in my margin loan (which I have outside super).

MGX is different to me. Its problem has been the balance of its board – too many members are seemingly very close to their Chinese customers for comfort – but it just rearranged its executive board and formed a new plan. The jury is out, but this looks promising – but it could go wrong. Would I hold it if I were to be in the wilderness? I will keep an eye on it from England.

Lynas (LYC) is a different story. Space precludes a detailed discussion, but the darling of 2011 has become the elephant in the room for late 2012. The main issue is if they will actually produce rare earths for sale from Malaysia. They had serious delays due to lobbying against environmental issues for six months to a year. The project has a green light but a capital raising might be necessary because of the costs of the delay. The world still needs rare earths for our high-tech world. I sold about half of my holding at prices from $1 to $2.50. Even with the price under $0.70, I would still make a tidy profit on this stock if I sold the rest now. I’m not overly confident, but the world’s need for rare earths has not gone away. But I will watch this one too.

So I sold all of my CSL (CSL) and Sonic Healthcare (SHL) recently without regrets. I feel the market is on a big move up and cyclicals will do better than defensives. I’ve held all of my stocks for quite some time – most for more than five years! Of course, the amount of each I own varies over time and I don’t have an equally-weighted portfolio!

Ron Bewley is the Executive Director of Woodhall Investment Research.

Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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