PDF Buy Low, Sell High: The Stocks You Should Buy Today

[Pages:11]Update & Strategic Outlook

12 August 2011

Buy Low, Sell High: The Stocks You Should Buy Today

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

- Ludwig Von Mises

What a week. Rioters looted and burned cities in England. The S&P downgraded US debt. And stock markets sold off hard. Here's an extract of what I sent to you last week, just before flying back to Argentina from England:

...here at Bonner & Partners we can relax. We're already positioned for market distress and we can ride through any short term market volatility with no problems.

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In fact we will profit from it. The best thing that could happen to us right now would be a general stock market crash. This would open up a world of new deep value investments, which have been hard to find of late.

Sure, the prices of our existing stock market investments would fall in the short run. But the underlying value of those stocks would be mostly unaffected in most situations, so there would be nothing to worry about. In most instances I'll recommend buying more of our existing stocks if prices fall hard.

Why Q4 Could Get Interesting

Right now feels both like the summer (in the northern hemisphere) of 2007 and 2008. There was a lot of bad news, but stocks were holding up fairly well. Traders were on holiday. The summer sun was lifting spirits, even if the news flow wasn't. (2007 was all about banks reporting sub-prime losses for the first time, 2008 was all about those same losses getting them into deep trouble).

In both years stocks fell hard in the fourth quarter, although 2008 was clearly more extreme. I suspect we'll get a repeat performance this year, as traders and decision makers get back from the beach and winter sets in to sour their moods.

No sooner had this been sent to you when traders' screens turned to a sea of red. S&P downgraded US debt and the crisis in the Eurozone continued with attention turned to France, Italy and Spain.

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This triggered a sharp sell-off in global stocks. Gold surged higher. US Treasury bonds also surged in a "flight to safety", possibly for a lack of liquid alternatives. The dollar moved up and down but has mainly tracked sideways. It's up a little since bottoming on July 26.

Our Diversification Strategy Is Working

But if you've followed our recommendations, then you should have been relaxed. Your stocks will have fallen in price, even if their long term value is relatively unaffected. You have cash waiting on the sidelines to buy value stocks at attractive prices. And your gold has put you ahead overall for the year.

In other words our strategy is working. We have a general idea where the world is heading, but market timing is extremely hard. The stock market plunge came slightly sooner than I thought, but the fact that it happened was expected.

It also shows the need for diversification. We have a large recommended weighting to gold, at 20% of the total family wealth portfolio. Gold has been the star performer this year. At one point it went over $1,800/oz. But it's fallen back to $1,743/oz as I write. Still, that means that gold is up 23.6% this year. In other words, a 20% allocation to gold at the start of 2011 has added 4.7% to total wealth in the space of just over seven months.

Since Bonner & Partners started in September 2009, gold is up 71.3%. So the original 20% allocation has added 14.5% to total wealth in less than two years. That's the kind of performance that many financial advisors and asset managers would be proud of for the entire portfolio. We've made it with just one fifth of our money.

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Where does gold go from here? In the short term I can't say. It could keep powering ahead as the eurozone crisis matures, and if (when) the US comes up with a new money-printing scheme. Or it could fall hard ? maybe 20% to 25% - as things settle down again for a short time.

But even if that happens I think gold has more juice in it before this bull market ends. We could see a situation where the allure of gold draws the general public into a speculative bubble. Or we could get more currency debasement and financial distress over a few years. Either way, gold doesn't feel like it's reached its final destination yet.

If you still own no gold then make it priority to buy some. I suggest a minimum allocation of 10% at these levels, irrespective of whether the price falls in the short term. If you had 20% at the start of this year there is a good chance that you now have a bigger allocation now, as stocks have fallen and gold has risen. But don't sell any of it. Just hold on. We're still far from the crisis end game.

Stocks Are Down ? Here Are Some To Buy

Our cash just became more valuable in relation to stock prices. As expected in falling markets the prices of our stock market investments have fallen as well. But these are just paper losses. You need to remember that stocks represent pieces of real companies with cash earnings and assets. Just because prices have fallen doesn't mean those companies' long term value has changed much, if at all.

Of course, prices could go down even more from here. Or they could start to recover. We don't know in the short run. But in the long run I'm confident that our stock market investments will deliver excellent profits.

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We have six "buy" recommendations in the current portfolio. This means that I think there is still a big margin of safety between the stock price and the (higher) underlying value of the stock.

The prices of some of these have fallen hard in the past couple of weeks. So this is an opportunity to add to existing positions, especially if you haven't bought these stocks yet. I'll briefly go through them one by one.

1. Chaoda Modern Agriculture (Holdings) Ltd. (HK:682) /(PINK:CMGHF). At HK$2.58 this now trades on a P/E of just 1.7 times my estimated 2011 earnings per share (EPS). I said before that this stock was priced for "vegetable Armageddon". It's now priced for, well, something worse than Armageddon. The Chinese will keep eating vegetables. Profits are likely to keep growing strongly. This is about as compelling a value play as you will ever find. But it may take time to play out, so we'll have to be patient.

2. Lippo Mapletree Retail Investment Trust (SIN:D5IU)/ (PINK:LOMRF). LMIRT, an owner of Indonesian retail malls, announced second quarter results on August 4. Building occupancy is 98%, the Indonesian economy continues to grow strongly, and the company still has very low debt levels. At a stock price of SG$0.56 and book-value-per-share (BVPS) of SG$0.85 the price-to-book ratio (P/B) is now 0.66. In other words, there is 52% upside to fair value, at current real estate prices. The dividend yield is now an attractive 7.8%.

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3. Vietnam Opportunity Fund (LON:VOF)/(PINK:VCVOF). The manager of this fund, VinaCapital, announced quarterly results on August 9. The net asset value (book value) increased 4.9% in the quarter, driven by the sale proceeds from an equity stake in Halico Vodka. BVPS was $2.34 at quarter end and $2.31 at the end of July, the reduction being driven by listed stock holdings. So at the current price of $1.38 VOF now trades on a P/B ratio of just 0.59, meaning 69% upside to fair value. Book value has almost certainly fallen since end of July, as listed Vietnamese stock prices have fallen along with the rest of the world. The Ho Chi Minh stock index is down 5.2% in that time (versus a fall of 10% for the S&P 500). However listed stocks are less than half of VOF's overall assets, so this is still a bargain.

4. Petroleo Brasileiro preferred stock (NYSE:PBR-A). At the time of writing, the stock trades at $25.40 in New York. It was cheap when I recommended it in December at $31.01. Having fallen 18%, it is now on a very attractive P/E ratio of 5.8. This is despite the price of Brent Crude, the international benchmark, increasing by 13.5% over the same time period. Dividends paid over the past year amount to 4.8% of the current price. And I expect payouts to grow strongly in the future, consistent with the company's track record.

5. Gazprom OAO (PINK:OGZPY) is now on a P/E ratio of 3.9 and a P/B ratio of 0.6. This looks completely unjustified. Russia still needs gas. Russia's former Soviet neighbors still need gas. Europe still needs gas. China will still need gas in future. I believe the shares are more than cheap enough to justify any perceived

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"Russian risk", and then some.

6. AFP Provida (NYSE:PVD). Chilean workers still receive salaries and are still obliged to save 10% into their pension schemes. Provida still charges fees on over 30% of those new savings. Despite this the price of Provida has fallen to $68.98, which is 11% below the price when I recommended it in May. The P/E ratio is now just 8.2, whereas I think 15 or more is fair value for this business. So the upside is 87% or more, before taking account of likely growth. The dividend yield is now right up to 9.6%. PVD is a cash machine, and it's going cheap.

You can add to your positions in any of these six stocks. That's not to say that prices can't fall further in the short term. But all of these six stocks are extremely cheap at these levels, especially if you take the long view. Just remember, stay diversified overall. In general I don't recommend that you put more than 2% of your total wealth into one individual stock.

I'm also reviewing our current "hold" recommendations. These are still value investments and definitely not overvalued. But in these cases the margin of safety between price and value isn't high enough to recommend that you add to positions. The stocks are Sterlite Industries (India) Ltd (NYSE:SLT), Altria Group Inc. (NYSE:MO) and Suntec Real Estate Investment Trust (SIN:T82U)/(PINK:SURVF).

I've said before that I'd like to switch out of Altria and into another tobacco stock with better profit growth prospects when the relative valuations look attractive. I keep this under constant review and will let you know when I think the time is right.

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And with Sterlite and Suntec I'll do a financial review and potentially one or both of these companies will be upgraded from "hold" to "buy". This will be if, and only if, I think the margin of safety between their market prices and their underlying values has widened enough to make them deep value investments again.

Reviewing Asset Allocations

I'm also reviewing the asset allocations in the family wealth portfolio. I recommended on February 11 a decrease in the allocation of stock market investments from 25% to 20%. At the same time we increased cash from 30% to 35% of the family wealth portfolio. Judging by reactions from many of you at the time this was a controversial move.

This reaction was understandable because stocks had been in a strong run since early 2010. But valuations around the world looked high to me at the time. And none of us here have ever bought into the "recovery" narrative coming out of the mouths of politicians, central bankers and stock promoters. So we couldn't see where the profits would come from in developed countries. And the sky high P/E multiples were a big problem in many emerging markets.

So we decided to "de-risk" a little but keep diversified. So we kept some exposure to stocks and worked hard to make sure that those we did recommend were cheap in absolute terms. That way they might fall in the short term (as they have done), but in the long run we should still make good profits on them.

Since decreasing our allocation to stock market investments the S&P 500 is down 13%. In fact it never rose more than 2.6% above the February 11 level. But here at Bonner & Partners we're mainly active in

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