The Year In Review: 2009
Patrick Stewart
2009 saw the market hit fresh lows in the wake of the global financial crisis, but it also saw a stunning recovery, punctuated by capital raisings and a return to M&A activity.
The overriding story of 2009 was the economy, and its delicate recovery. It was a rebounding market with a fragile sense that the worst was over; a topsy-turvy twelve months that saw the S&P/ASX 200 reach a low of 3120 in March, only to recoup a whopping 50% by year’s end. When the year commenced, the average investor was long fear and short rationality: it seemed an end was nowhere in sight.
2009 ended up being a very busy time at the Report, with a wide range of recommendations, which we discuss below.
Capital Raisings
Many companies were desperate to repair their balance sheets, and so came the influx of capital raisings, share purchase plans and rights issues. Having proven lucrative in the past, we were more than happy to take another look. And didn’t they prove profitable!
Asciano Group (AIO) proved to be one of the more spectacular recommendations. We bought AIO on 11 June, predicting a possible arbitrage opportunity. Our recommendation was to buy $500 worth to get ourselves on the share registry. Like many companies in the headlines last year, AIO had got itself into one helluva mess and had no choice but to sell non-core assets and conduct a rights issue. And that’s exactly what it did. On 17 July, AIO announced it would be conducting a share purchase plan (SPP), offering $10,000 worth of new stock at $1.10. By 22 July, the stock had reached $1.32 and at this level, we were even happy re-recommending the stock as a separate buy. Once the SPP had been completed, we had quite a large holding in AIO and on 10 September, we sold our entire parcel at $1.68, leaving us with a combined profit of 37% in a matter of 13 weeks.
Wesfarmers Ltd (WES) was another very successful SPP we took part in last year. The company offered new stock at $13.50 and by the time the new stock was trading, the share price was at $17.00. We ultimately sold WES at $25.50, resulting in a 54% profit.
Throughout 2009, we took part in arbitrages in a number of other companies including Graincorp Ltd (GNC), Amcor Ltd (AMC), Brickworks Ltd (BKW) and Elders Ltd (ELD) to list a few.
Dogs
All of the Dogs are on track to give some pretty solid returns this year. More recently, the January Dogs had its first rebalance, and with companies like Macquarie Group Ltd (MQG) and Commonwealth Bank of Australia Ltd (CBA) in the mix, it’s not surprising it returned over 44%. These weren’t the only two performers either; nine of the ten stocks returned a profit.
Options
So how do we make the most of a recovering yet fragile market? One way we are growing increasingly fond of is via the use of options trading (generally writing covered call options). The results have spoken for themselves, with BHP Billiton (BHP), Woodside Petroleum Ltd (WPL) and Westfield Group (WDC) all returning profits, to name but a few. In February, we had two call options, one on BHP and the other on WDC, expiring on the same day. The market was in a sideways to downward pattern, so there was only a minimal chance that either would reach their exercise price. The pre-brokerage premium generated from the WDC covered call strategy was $340 per options contract, plus the estimated unfranked distribution of $532.50, which added up to $872.50. BHP also paid a dividend during the period of the trade, so we generated (again, per options contract) $649.50 in dividends plus the option premium of $720, providing a total of $1,369.50. Including franking credits, the combined cash return over the two month period was $1,647.90.
Short Term Trades (and the upcoming Rivkin Trading Report)
In the first half of the year, we recommended a number of shorter term trades, using a strict stop-loss methodology. The stocks we traded on this basis were Tabcorp Holdings Ltd (TAH), Worley Parsons Ltd (WOR), AMP Ltd (AMP) and Origin Energy Ltd (ORG). Often, this style of trading is marked by several losing trades before the ‘big one’ (WOR) comes along. This means that to trade this system, all trades must be taken: cherry picking trades can mean you will get either very lucky or very unlucky. WorleyParsons Ltd (WOR), a provider of professional services to the energy, resource and infrastructure industry, is a company we had admired for some time. Based on its excellent management track record and strong acquisition history, and with some very positive volume and price indicators, we recommended a buy on WOR on 6 May at $20.05. Within a week we were out.
On May 11, we sold our holding at $24.50, a 22.2% profit!
Given this style of trading is somewhat different to the style historically used in The Rivkin Report, we have decided to create a new trading report that focuses purely on price-action based trades and uses stop-losses to preserve capital. This report will be ideally suited to shorter term CFD traders and will be available (at least in test format) around March/April 2010.
Other Recommendations
Another few trades worth mentioning have been, firstly, Rio Tinto Ltd (RIO), which we traded in and out of a number of times. We bought RIO once and sold it twice throughout the year. The first sell was from a short term trade we placed on the stock, buying in May and selling in June, locking in a 15% profit. The second was from a long-term recommendation we held on the stock, finally selling later in the year. Another trade we made was our sell on Premier Investments (PMV). We entered this stock through the JST takeover in 2008, and by the time we sold mid last year, we had secured a 28% profit.
Over the year, we trimmed our exposure to small cap stocks, as we said we would. We sold FSA Group Ltd (FSA), Allied Brands Ltd (ABQ) and Cash Converters Ltd (CCV).
Our Mistakes
In hindsight, we were far too trigger happy with our sell decisions. Fundamental analysis often proves to be a tool that is too blunt in deciding whether a stock has run too far. Fairly priced stocks can easily become overpriced stocks if momentum is behind the market. Notable stocks that we sold too quickly include BHP Billiton Ltd (BHP) early in the year, Premier Investments Ltd (PMV), Asciano Group (AIO) and the second time we traded Rio Tinto Ltd (RIO).
A strategy that works well is to start trimming positions as the share price advances, especially when prices rapidly spike, and going forward we will be vigilant in employing this strategy and letting our remaining profits run.
We sold Macquarie Group Ltd (MQG) between $32.60 and $35.75 in January and we felt like geniuses as the share price promptly dropped to $15! It truly felt like the great MQG was walking into its own grave.
Outlook
Now as the world continues its recovery, with better unemployment levels, increased demand for resources, more overseas travel, higher retail sale levels and so on, we are faced with the reality that as we return to normality, there will be obstacles. On the final day of trading for 2009, Wall St dipped about 1% after the better than expected unemployment claims data sparked concerns that the US Federal Reserve would withdraw stimulus measures and lift interest rates sooner than expected. Federal Reserve chairman Ben Bernanke has stated recently that the central bank must be “especially vigilant” to prevent the formation of wild asset bubbles cropping up again.
With corporates now cashed up after some defensive capital raisings and with a clearer outlook for the economy, we have begun to see the re-emergence of merger and acquisition activity. This development will continue into the New Year as this cash is put to work. Furthermore, one can expect more and more floats; despite the poor debut of Myer Holdings (MYR), should the market continue to produce healthy returns, we feel this will become a trend.
Now what can we expect from the year ahead, and we suppose more importantly, what do we want to achieve? Right now, the market sits just below 5000 points, a long way from where it bottomed, yes, but let’s not forget that this is still a far cry from where it peaked. While we do feel that both the banks and large cap mining stocks represent excellent long term opportunities, we think that outperformance will come from elsewhere, and so we will need to be both flexible and adaptive.