Investment Stratagy for the second half of 2014.

[Beagle]

We're almost at the half way point of the year and its certainly been a dramatic first
half with some tech stocks falling nearly 50% from their peak's.

With an almost unprecedented tech supply coming to the market it appears there's
only a certain amount of risk capital around and existing tech companies have got the
belting while hot money chases the next prospect of nailing the next ten bagger. But
what are these existing tech companies really worth now we have negative momentum
and no PE or yield to work off. Could small investors finally get the chance to top up
their investment in XRO @ $18 after the big boys so rudely and unfairly excluded
them last year ? Is it even worth $18 ?
http://www.sharechat.co.nz/article/8c81f1f7/pacific-edge-xero-slide-as-investors-shun-growth-stocks.html?utm_medium=email&utm_campaign=Pacific+Edge+Xero+slide+as+investors+ shun+growth+stocks&utm_content=Pacific+Edge+Xero+slide+as+investors+s hun+growth+stocks+CID_07aab84e8b28157964b4a9fef4b4 d34d&utm_source=Email%20marketing%20software&utm_term=httpwwwsharechatconzarticle8c81f1f7pacifi c-edge-xero-slide-as-investors-shun-growth-stockshtml

So I thought perhaps it might be an idea to have a thread to discuss your investment
strategy for the second half of the year, given almost unprecedented changes in the
first half.

My central thesis going forward is to continue to build a well diversified portfolio of
proven performers with realistic PE multiples of current earnings. Call me a
conservative old accountant, (if you must), but show me the money is my catch-cry for
the second half. Realistic PE's, strong companies, decent fully imputed
dividends...should stand up well to what I perceive to be a sideways market for the
remainder of the year. I think the market is fully priced so I'm running with a conservative
portfolio with my biggest holdings being, CASH, GMT, AIR, HNZ, PGW.

There's some great companies out there that I'd like to add such as MFT and AIA to name
two but I think the market is vulnerable to a pull-back with higher interest rates and these
stocks are fully priced as are many others and PE's are simply too high for a rising
interest rate environment.

I'll also just put this out there for debate and call it as I see it...you'd have to be living
under a rock for years too not already be aware of the favourable tailwinds in the
retirement sector, they've been trumpeting these for years and growth appears to be
slowing so is there really any more meat left on the table with a PE of 35 for the likes
of SUM and RYM or will we see a price stagnation for quite some time as PE
contraction gradually kicks in with higher interest rates and the PE contracts in line
with earnings growth and all you get is an un-imputed ~ 1% dividend yield ?

What's your thoughts and strategy for the second half of 2014 ?

[MAC]

In an interest rate rising environment growth stocks tend to flourish as higher interest rates start to impact mature cyclical stocks which have already risen to become fully valued.

In the past during said circumstances, investors have tended to re-balance, in attempting to maintain consistent returns, by moving higher up the risk reward curve. This is where we should anticipate the money flows to go.

We have had a risk off period over the last few months due to macro market influences and the US in particular being perhaps a year behind NZ in the economic and interest rate cycle.

With interest rates rising here, perhaps soon in the UK and in the US next year, watch for growth stocks coming into prevalence again big time.

Although, I would clarify that by growth stocks, I’m not referring to exuberant tech stocks, a common confusion.

Some look like quite good buying opportunities about here with a 12 to 24 month horizon.

5952
5953

[winner69]

MAC - where those charts you posted come from also said this -

The New Zealand market now has a forward (12 months) price earnings multiple of 17.4 times (2.8 standard deviations above the last 24 years) while the Australian market has a forward PE multiple of 14.7 times (0.7 standard deviations above the historical average).

Seems quite a difference between the two countries eh and would suggest NZX a bit 'riskier'

Interesting paper they produced .... even though the I feel they wanted to convince themselves holding NZ shares will be OK over the next 36 months

[traineeinvestor]

I'm finding it a but easier to identify valuations I am comfortable with in Australian stocks than New Zealand ones. In some cases tax loss selling may be creating opportunities (I'm sure most of you will be aware that Australia has capital gains tax regime and the tax year ends on 30 June).

I picked up a few more shares in NAB today.

[MAC]

I don’t disagree Winner, although I do attribute some of the NZX elevation in PE to some substantial recent changes in the makeup of the NZ50 with large utility and other IPO’s coming in over the last 18 months. A flurry of IPO's yet to settle.

You could go into growth, or as you say go offshore until those markets cycles catch up, but I don't think we are very far ahead, six months to a year.

Cripes, one market is enough for me to keep up with let alone two or more, each to their own though.

[macduffy]

An interesting point made in a recent edition of AFR - read quickly in the local library - concerned the popularity of (Australian) stocks that don't necessarily show a current high yield but have better than average chance of increasing their payout in the next 2-3 years. The theory hinged around identifying and buying these companies now with the intention of selling them to SMPS - Self Managed Pension Scheme - individuals as the yields - and shareprices - increase. A big market in Aussie, apparently! Flight Centre and Bluescope were a couple of the stocks mentioned - others have been lost in the fading memory cells, somewhere. The principle of identifying and buying for growth, rather than last year's result, holds good for all markets, of course.

[percy]

With their business's improving and profits growing I have invested in Heartland and PGW.Both already pay good dividends,which I expect will grow.

[BIRMANBOY]

Now there's a surprise Percy LOL
With their business's improving and profits growing I have invested in Heartland and PGW.Both already pay good dividends,which I expect will grow.

[winner69]

I don’t disagree Winner, although I do attribute some of the NZX elevation in PE to some substantial recent changes in the makeup of the NZ50 with large utility and other IPO’s coming in over the last 18 months. A flurry of IPO's yet to settle.

You could go into growth, or as you say go offshore until those markets cycles catch up, but I don't think we are very far ahead, six months to a year.

Cripes, one market is enough for me to keep up with let alone two or more, each to their own though.

Do you know how they calculate the PE when a few of the companies have losses .....I get several answers when I ask around.

The common answer seems to to be it just an arithmetic exercise by adding the +ve EPS and taking off the -ve EPS.

Intuitively this suggests that the overall PE of the in profit companies is less than the market average

You know"

[Beagle]

In an interest rate rising environment growth stocks tend to flourish as higher interest rates start to impact mature cyclical stocks which have already risen to become fully valued.

In the past during said circumstances, investors have tended to re-balance, in attempting to maintain consistent returns, by moving higher up the risk reward curve. This is where we should anticipate the money flows to go.

We have had a risk off period over the last few months due to macro market influences and the US in particular being perhaps a year behind NZ in the economic and interest rate cycle.

With interest rates rising here, perhaps soon in the UK and in the US next year, watch for growth stocks coming into prevalence again big time.

Although, I would clarify that by growth stocks, I’m not referring to exuberant tech stocks, a common confusion.

Some look like quite good buying opportunities about here with a 12 to 24 month horizon.

5952
5953

Thanks for that post Mac. The first graph serves to illustrate my main concern and main point. Forward PE's are too high and valuations have never been this stretched in the last 22 years. More of a concern is that in the times when forward PE's have approached 17 before, we've subsequently seen a sharp contraction in PE's afterwards. I don't see any reason why this time wouldn't be any different, especially in a rising interest rate environment and judging by the glut on IPO's, clearly others in the market see this as an opportune time to float, (or attempt to float, some dog's are so over-priced, some things are impossible, especially for greedy promotors).

Hence my thesis revolves around staying liquid, investing in what I believe to be the best quality LPT in GMT, which is purely a safe haven yield pay at these level's) and investing in companies with realistic PE's. There are very few quality companies with a growth profile of growing EPS, (not sales and losses) that arn't already priced in the upper quartile of N.Z companies, AIR and HNZ being the obvious exceptions.

I think the Reserve bank are too harsh on the brakes and the effects will be felt in the second half. Tech, too many companies chasing the same risk capital, the supply demand equilibrium has never l;ooked worse and is the exact opposite of the Auckland housing market.

GMT @ $1.06 are on a PIE exempt yield of 6.11%, equilivent to a gross yield of 9.12% for those on a 33% tax rate and only distribute 80% of their earnings, (unlike most other LPT's with a higher payout ratio) while they continue to grow their new property developments. Prognosis for growing future dividends and increasing the payout ratio as their land holdings are developed looks very good. Low beta and they're as boring as bat**** but a great safe place to hide and investors are being well rewarded while they wait for even bigger dividends in the years ahead. I hold plenty while I wait for the market to become more sensibly priced.

The problem with Aust investment is the age old inability to claim franking credits, so Kiwi investors have one hand tied behind their back from the get-go.

http://www.sharechat.co.nz/article/1dd5bbe3/update-xero-responds-to-price-inquiry-as-investors-shun-growth-stocks.html?utm_medium=email&utm_campaign=UPDATE+Xero+responds+to+price+inquiry +as+investors+shun+growth+stocks&utm_content=UPDATE+Xero+responds+to+price+inquiry+ as+investors+shun+growth+stocks+CID_ddff534096788b 98747aae6c178c4e2f&utm_source=Email%20marketing%20software&utm_term=httpwwwsharechatconzarticle1dd5bbe3update-xero-responds-to-price-inquiry-as-investors-shun-growth-stockshtml

[percy]

Now there's a surprise Percy LOL

No surprises backing strong growing businesses whose profits will support INCREASING dividends.