We always keep an eye on list of shares that we like and happily pick up some for the portfolio when the crowd head for the exits and getting out at any cost. Here is a selected list of shares to watch and highlighted commentaries on why we like it and potential catalyst in value realization.
There are some overlaps with our model dividend portfolio but rather than highlight what we own, these shares to watch when there is a pullback in prices.
QBE Insurance – ASX:QBE
Global insurer with investment portfolio heavily weighted to fixed income portfolio. Earnings depressed post financial crises from record low interest rates. It has out performed recently due to income reported in US dollars and potential recovery in global interest rates. This would provide pick up in future earnings.
Catalyst
Changes in interest rate expectations where rates are expected to rise in the future. Best when in anticipation of continual rise in interest rates rather than once off symbolic increase from recent cycle lows. Current low payout ratio result in potential faster dividend income growth relative to earning recovery.
iShares Emerging Market ETF – ASX:IEM
While we are primarily stock pickers. We like to focus on areas where we have an edge. ETF or index funds can be used in areas where we have macro view and no individual stock pick edge and happily to own the market.
IEM provides an easy access broader diversified market. Emerging markets has had a pretty bad beat on the back of rise of US dollar. We like emerging market due to the relative value in comparison of developed markets like the S&P 500 and ASX 200. It has under performed recently and we like the risk and reward at this level.
Australia and New Zealand Bank – ASX:ANZ
The Australian bank stocks has fallen almost 20% off the recent peak. Following the downgrade where we were pretty sanguine on the sector due to higher capital requirements, cyclical low on bad credit provisions and growth prospects.
Guns to our head, we prefer ANZ over the rest of the big four due to Asian exposure. Asia while out of favour by most investors due to slow down in China. The potential is still there with growth rates about Australian in the near future and ANZ is the best Australian bank that can capitalize on this through its regionalism business model.
This is in addition to ANZ being the largest bank in New Zealand. The weak dairy prices has put downward pressure on the NZD and the broader economy. However the secular growth story is still there for diary.
ANZ currently still trades significantly above book value as measured by price to book ratio. Franked dividends is one of the only positive aspects of the stock. Long term holders can instead of buying more given the current uncertainty participant in any future dividend reinvestment plans to build up a position that pays income in the meantime.
At this stage we do not foresee any cut in dividends although further dividend growth is suspect at best given higher capital requirement. The fall in bank stocks is an earning growth and capital issue not a dividend risk at this stage. This is predicated on that the forecast rise in credit provision is managed. When the data change we will change our mind on this.
Fonterra Shareholders’ Fund – ASX:FSF
Producer of end dairy products. One of the largest listed dairy good producer. Beaten down follow the current weak dairy prices. We prefer to own in in New Zealand dollars as earnings are leveraged to a multiple of depreciation of the NZD.
BHP Billiton – ASX:BHP
See our summary analysis of S32 which shows that BHP spun off the Alumina, Coal and Nickel assets.
We like the new BHP which is cleaner with pure exposure to iron ore, oil and copper. Chart below shows BHP in USD dollars.