Why The Worst Stock Of 2009 Could Be Your Best Buy In 2010 By Kris Sayce
IN THIS special issue of Australian Small Cap Investigator, Kris Sayce explains why the most beaten up financial stock of 2009 could present quick thinking investors with an opportunity to buy a blue chip share at a small cap price... and make a 207% gain over the next two years...
Since the financial markets went into meltdown during 2008 and into 2009, there has been a consolidation of businesses in the financial services sector.
In the U.S. and Europe, banks have gone bust or have been bailed out - either by the government or as a result of a takeover. The story locally hasn't been as different as the press would have you believe. The government devised guarantees to keep the banks afloat. Commonwealth Bank bought BankWest from the dying Halifax Bank of Scotland Group. And before that Westpac snared St George Bank.
There have been similar regenerations all over the financial services industry. That's only natural. During times of uncertainty, investors seek out institutions they believe are safe. That's why the four major Aussie banks have stolen market share from smaller competitors on both sides of the ledger.
Still, these are uncertain times for the financial services sector right now - and, for the most part, I'd steer clear... for the most part...
You see, I've spotted one unique opportunity I think is well worth taking a punt on. It's risky, for sure - but I believe there's far more upside potential than downside - as I'll explain...
Buy this blue chip name at a small cap price for a potential 207% gain
Until recently, this company was a mishmash of loosely connected businesses, including interests in insurance, real estate, banking, rural services, futures trading, automotive parts, and even a fruits business. In short, this firm was exposed to the global financial crisis on virtually every front - and it suffered, heavily, as a result. Carrying more than $1 billion of debt didn't help matters either.
It became clear this company had wildly overextended itself, becoming dangerously vulnerable to the economy taking a dive in the process. Its slide came as little surprise. But to arrest it the firm needed to shed weight and buck its ideas up... fast.
To its credit, the company promptly got on the case. A new management team was swiftly installed with a remit to cut costs, streamline the business and divest the firm of what they perceived as non-core businesses. They also were told to raise cash - lots of it.
The weight-shedding is now well underway. Plus, a recent share offering is likely to see the company generate over $900 million. That will take care of a sizeable chunk of its debts.
The company is a lot leaner since they ditched a lot of the deadweight. After the cull they're left with just three key business units: Rural Services, Financial Services and Real Estate.
Things are looking up.
3 reasons why this 'phoenix-from-the-flames' could fire-up your portfolio in 2010
During the last financial year these three core businesses accounted for $2.19 billion of revenue for the company. This Lazarus-like comeback has largely gone unnoticed by investors...
In a moment I'll reveal how you can invest in this company's great turnaround for pocket change. First I want to tell you a little more about how they've managed this incredible volte face...
First, its streamlined rural services business now provides a marketing service to dairy, crops and cattle farmers. Rather than the farmer negotiating export or supply deals with each processor, this firm acts as the middle man, brokering deals and doing all the hard negotiating.
What I'm looking for here is access and scope for growth. This firm now has both. It claims to be the largest dairy cattle exporter in Australia, providing exclusive access to markets and buyers in Russia, China, Mexico, Turkey and the Middle East. In a notoriously tricky industry, this company has a solid foothold. That's one box checked.
Finally: a banking stock worth buying...
This firm's new financial services business comprises banking, financial planning and home loans.
Banking is one of my least favourite sectors to invest in. I consider banks to be nothing more than a highly leveraged exposure to the housing market. They certainly aren't the safe and dependable investments most brokers and financial planners will claim. That's what makes this possibly the most 'contrarian' of all my stock picks to date.
This stock is actually worth buying... you see, while this firm is as leveraged as many of its rivals, it's a tiny operation when you compare it to the bigger players. I see plenty of room for growth, and after a shocking run, its fundamentals are certainly looking steadier, if not rock solid.
For instance, it has a loan book of $3.66 billion with customer deposits of $3.75 billion. That's compared to the smallest of the Big 4 banks - ANZ Bank - which has a $332 billion loan book and $294 billion of deposits.
As I say, this is a sector I'd normally rather avoid. But at a stock price of around $1.50 I reckon this stock is well worth taking a punt. Details on how you can buy this "sleeping giant" share at a bargain basement price coming up - right after I've told you about the third growing area of its restructured business...
Is this the only exposure to property worth having?
This company's real estate business offers the conventional - residential homes in rural Australia - to the unconventional - farm land in Uruguay. Or perhaps you fancy a ranch in Colorado, USA. Whatever your take on the property market - and mine hasn't always been favourable in recent months - you have to admit that's a fairly good way of spreading your risk.
But the biggest boon for this company - and the biggest attraction for me - is that share price. If you're going to get some exposure to property as an asset class, I think it's much better to be in at this kind of price as opposed to weighing in behind some of the blue chips where you'd struggle to see any more upside - especially if you believe there's more volatility on the horizon.
Put it this way: right now I'd rather buy this stock at $1.50 than ANZ Bank at $21. But I can see this raises a fairly obvious question...
Why tip a stock that's exposed to two sectors I dislike?
Regular readers of Money Morning will think I've taken leave of my senses when they read this special issue of Australian Small Cap Investigator. But there's method in my madness. Take a look at the chart below and I'll explain it to you...
This chart shows the performance of the four major Australian banks since November 2007. Up until recently, the four majors were almost back to the price levels they reached in late 2007. In my opinion that isn't justified.
That said, in contrast to how the four major banks have performed, the stock I think you should tuck away in your portfolio is still down by 95% since the peak.
The market considers it to be a high risk investment due to recent history and the uncertainty still surrounding it. I think that plays in your favour. Yes, it's risky - but this is a fantastic contrarian play... to quote that old Buffett adage; it's your chance to be greedy where others are fearful.
This once-great firm has rescued itself from near obscurity - but the wider market hasn't caught on yet. When it does, and starts to price this stock closer to where I believe its real value is, I think you'll see a healthy boost in its share price. If it moves in line with the four major banks, it could be quite a ride for investors who get in quickly. Bottom line: if you're after a high risk investment that could have plenty of quick upside, this ticks all the boxes.
Get in quickly and here's what you could be looking at:
A potential 207% gain within 24 months
The company is still going through its restructuring process, which means it will lose some revenues but also some costs. The important factor behind the restructuring is that it's keeping what it believes to be the core businesses, while jettisoning deadweight.
Based on the current market cap of $650 million, our first target would be for the company to report profits in 2010 of around $65 million or more. Now that could be a tall order, considering it posted a $466 million loss for 2009 - it certainly has work to do. It may be that the impact of the turnaround won't be felt until the 2011 financial year.
That's why I'm keen for you to stick rigidly to the 'buy-up-to' price I'll send you with the rest of my research on this company. If you rush in and pay over the odds for this stock then you could find your potential return is reduced.
But, if you stick to my 'buy-up-to' price there's always a chance the market could start to look more favourably on this "comeback kid" much sooner than even I think.
Step two is for the company to earn back some confidence from the market. If investors like what they see and gain confidence in the new management, they'll be willing to pay more for the share in anticipation of bigger revenues and profits. You should be well placed if and when this happens.
Step three is for the company to pay investors back - in other words; grow revenues and profits. A return to form is most definitely possible - and it looks more likely now than at any stage in the last five years - but it will take effort. With a leaner and more focused operation I believe there's a very real chance this company can grow net profits to around $80-$100 million within the next couple of years.
But where will this growth come from?
First, you need to know that the $466 million loss isn't as bad as it looks. Most of this loss was due to one-off asset writedowns. It's hoped the company won't need to devalue its assets any further this year.
However, a loss is still a loss. And the punt we're taking here is that the company is now at the bottom of the business cycle.
The important thing is that the company reported 'underlying' profits in the key areas of the business - and it's those key areas which will be the major focus for the company going in to 2010.
So, if this truly is the bottom of the cycle then we should expect to see revenues and profits gradually increase to the levels achieved in previous years. For that to happen, it depends on a couple of things:
First, an improving economy. Second, strong demand from rural Australia for its products and services. (Yes, that may sound like a tall order, but remember, this is no less risky than any of my more speculative Australian Small Cap Investigator recommendations).
On the plus side, even though the company has moved from making good profits into making a loss, sales revenues haven't taken a big hit. That suggests we need to see the company focusing on either reducing costs, or better, managing cost volatility.
Should it do so, and if valuations of the stock move higher, then a market cap of $2 billion is achievable. In terms of the share price I'm looking for an ultimate target of $4.60. That would make you a gain of 207% over the next two years - provided all goes to plan.
A stock for people who can think for themselves
This recommendation is something of a departure for Australian Small Cap Investigator. It's not a growth story... it's not an unheard-of energy company on the cusp of a huge discovery... or a tiny biotech firm about to launch a potentially breakthrough treatment. This is a pure small cap VALUE play - that is; it's a beaten down stock with heaps of balance sheet value that the wider market has largely ignored - or snubbed.
These kinds of stocks can be incredibly lucrative - provided you buy in at the right time. Plus, they are wonderfully contrarian, which is at the heart of the Australian Small Cap Investigator ethos. Buy this stock and you're deliberately going against the herd and thinking for yourself.
What to do now...
If you want to find out more about what I believe is one of the best bargain buys for 2010, I've prepared a full briefing on this company - including more detail on the risks, potential and all important action to take - in the latest issue of Australian Small Cap Investigator.
You can get my full research on this stock right now, plus instant access to the Australian Small Cap Investigator portfolio, by agreeing to take a 30-day completely risk free trial of my service.
To download the rest of my research on the best bargain buy of 2010, and claim your 30-day trial of Australian Small Cap Investigator, just click here.
Best Regards,
Kris Sayce Editor Australian Small Cap Investigator
ELD Price at posting:
$1.39 Sentiment: LT Buy Disclosure: Not Held
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