In the real world things can change quickly. But in the psychedelic mirror-world of the sharemarket, ‘‘reality’’ is frequently inverted by time. A belief that seems real becomes illusory and what seems illusory emerges as concrete and fully-formed.
This time last year, when economic uncertainty reigned, it was thought ‘‘defensive stocks’’ like Woolworths and Tatts Group were sensible purchases. Trouble was, in pursuing this widely held belief, investors paid high prices. Those buying at the time were paying too much for the perceived safety of what were, frankly, pretty staid businesses.
In contrast, cyclical businesses were on our shopping list at The Intelligent Investor; the very opposite of defensive stocks. They included the likes of Flight Centre, Platinum Asset Management, Fantastic Holdings (owner of the Fantastic Furniture chain) and Billabong International.
That reality has now been transformed. Confidence is back. Those same cyclical stocks that people were avoiding last year have become today’s darlings. To investors, what once looked thin is now fat and what was fat appears thin.
It’s easy for our perceptions to distort our decision making. But remembering that, as Ben Graham once said, in ‘‘the short run the market is a voting machine but in the long it is a weighing machine’’ should help us to maintain an equilibrium and foster a contrarian spirit.
So it may not surprise you that our research team is now focused on yesteryear’s darlings; today’s ugly ducklings. As you read this, our analysts are running the rule over some of the bluest of Australia’s blue chips. It may not be fashionable but it is, I’d suggest, potentially more profitable.
Stocks such as CSL, Santos, QBE Insurance and, yes, even Woolworths have been left behind as investors have regained their stomach for risk. We’ve pulled the buy trigger on some of those names already and have others in our sights.
And lest you think ‘‘buying quality’’ is boring, there’s already some evidence that it’s paying off. Take Aristocrat Leisure, for example.
In my Betting on prosperous times column on 4 December, I laid out the case for Australia’s largest poker machine manufacturer. It was (and continues to be) besieged by problems. Yet it has a very strong underlying business and a lot of bad news was already in December’s share price. There was plenty of scope for recovery when things improved.
And improve they have. This week Aristocrat released a profit upgrade and the stock took off.
Although it’s important not to read too much into short term price gyrations, Aristocrat shareholders have enjoyed a 17% share price rise since that original column while the broader sharemarket has fallen by 2%.
There are other examples of quality companies reporting recent upgrades - Computershare and Flight Centre are but two - while other, arguably lesser, businesses have fallen after profit warnings. Such names include Transpacific Industries, WDS, Australian Agricultural Company, AJ Lucas and WorleyParsons.
In an example of where we’re looking for quality, in my next column I’ll share our team’s thoughts on a company with high quality assets that trades on a PER of just 7.5 and a fully franked dividend yield of more than 9%.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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