Martin Roth - Top Stocks 2013 Half Yearly Update: A Sharebuyers Guide to Leading Australian Companies

The author and publisher would like to thank Alan Hull (author of Active Investing ,

Revised Edition, Trade My Way and Invest My Way ; www.alanhull.com) for generating the five-year share-price graphs.

This half-yearly edition first published 2013 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in 10/12 pt Berkeley

First edition published as Top Stocks by Wrightbooks in 1995

Martin Roth 2013

The moral rights of the author have been asserted

ISBN: 9781118406236 (ebook: epub)

9781118406229 (ebook: Kindle)

9781118406243 (pbk.)

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover design by C. Wallace

Cover image: Financial Chart istockphoto.com/Petrovich9

All charts created with TradeStation. TradeStation Technologies, Inc. 20012013. All rights reserved. No investment or trading advice, recommendation or opinions are being given or intended.

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

Preface

The words that began my preface to Top Stocks 2013 were prescient. I wrote:

Bear markets do not last forever. Unfortunately, as has so often been observed, no-one rings a bell when a bear market is over. Instead, stocks start to creep back upwards, and at some point, when they have already regained much of their perceived value, the average investor starts to decide it might be time to get back into the market.

I then quoted a couple of authorities who stated their beliefs that the 201213 period would see an improvement in investor returns. One even said that 2013 could see the start of a new bull market.

The S&P/ASX index closed below the 4000 mark in June 2012 (below the 3900 level in October 2011 if you want to go back further), but, as I was writing the above words, shares were already creeping up. By the time Top Stocks 2013 hit the bookstores, late in 2012, the market move was gathering steam. Indeed, the first two months of 2013 were said to be the best start to a year for shares in more than 30 years. In February this year the index rose back through 5000.

A popular definition of a bull market is when shares have risen at least 20 per cent. So on this basis we are certainly back in a bull market. Readers of Top Stocks 2013 who bought into the market at the time the book was published could have realised some steep gains in a short period.

The bull market may continue. Many observers though certainly not all believe it will, at least for a while. But it is likely that not all stocks will participate. Stock-picking skills are going to be crucial for investors.

One of many stock market maxims is that a rising tide will lift all boats. But not all stocks have been doing well. The recent financial results announcements have shown quite a divergence between companies, even companies that are in the same sector and that are exposed to the same trends. Some continue to perform very well, but others are struggling. Some are optimistic about the outlook, others pessimistic.

A classic example is engineering company Monadelphous, which provides a variety of support services for the resources industry. It reported that in the half-year to December 2012 its after-tax profit rose by more than 35 per cent, and it expected the strong growth to continue, at least in the short term.

Yet Ausdrill, another mining support company exposed to the same trends, reported a significant slowdown for some of its services, and profits fell more than 10 per cent.

So this is an opportune time to publish, for the first time, a mid-year update of Top Stocks , based on the financial results announced for most companies in January and February 2013. All the companies from Top Stocks 2013 are here, apart from two Consolidated Media Holdings and Little World Beverages that have been taken over and delisted from the ASX.

Outlook

It has never been the role of Top Stocks to try to forecast the market. Indeed, market experts themselves seem as sharply divided as ever on whether the current strength is sustainable. Some see the new bull market as based on little more than weight of money, as governments pump money into various stimulus measures aimed at reviving economic growth. When the money stops the market will stop, they say.

Worse, another blow-up in Europe, where many economies remain fragile, could send stock markets spiralling downwards around the world. News of a Chinese slowdown could have a similar impact, especially in Australia. And many investors remain nervous about the possibility of a new US recession.

But others believe that a slow recovery from the global financial crisis, leading to a steady improvement in corporate profits, is the driving force. As long as our domestic economy continues its remarkable long-term growth record, shares too should continue to rise. The US economy too seems to be showing signs of growing, and many believe Chinese growth will be better than earlier feared. A year-end target for the S&P/ASX 200 index of 5600 is sometimes being touted. It seems a big move, but even this will still be 18 per cent below the index high reached in November 2007.

Low interest rates are another positive factor for shares, as investors switch from cash investments, such as term deposit bank accounts, into the sharemarket. Certainly there has been recently a move from growth stocks into companies that pay a good dividend yield. Yet even despite recent strength, shares in companies such as the banks or Telstra are offering yields that are higher than a bank term deposit.

Fears that bond markets have become overvalued are another factor driving share prices higher. An apparent recovery in housing prices in some regions is boosting investor confidence.

A research report from AMP Capital, published in February 2013, said that cyclical bull markets in Australia have a tendency to run for up to four years, with average share prices more than doubling during that period. Such a market typically goes through three phases.

In the first phase investors rush into the shares of companies perceived as undervalued. Next comes a period driven by strengthening corporate profits. The third phase, investor euphoria, sees share prices soaring to excessive valuations.

According to the report, Australian shares appeared in February to be reaching the end of the first phase.

Latest results

Most companies in Top Stocks 2013 reported their mid-year financial results in January and February 2013.