Top 20 stocks - Amazon Web Services

Top 20 stocks:

The good, the bad and the ugly

special report | june 2014

Intelligent Investor Share Advisor PO Box Q744 Queen Vic. Bldg NSW 1230 T 1800 620 414 F 02 9387 8674 info@.au shares..au

PO Box Q744

Contents

Queen Victoria Bldg. NSW 1230

T 1800 620 414

F 02 9387 8674

Of diamonds and dogs

3

info@.au A review of 2007's ranking

3

shares..au Lessons from 2007's ranking

4

Australia's Top 20 stocks ranked by investment

5

DISCLAIMER This publication attractiveness

is general in nature and does

Using Intelligent Investor's value-based ranking

6

not take your personal situation Prudence stuck on Blue Chips

8

into consideration. You should

seek financial advice specific to

your situation before making

any financial decision.

Past performance is not a reliable indicator of future performance. We encourage you to think of investing as a long-term pursuit.

DISCLOSURE As at 1 June 2014, in-house staff of Intelligent Investor held the following listed securities or managed investment schemes: ALL, AOG, ARP, ASX, AWC, AWE, AZZ, COH, CPU, CSL, EGG, ICQ, IFM, JIN, KRM, MAU, MIX, MQG, NBL, NST, PTM, QBE, RMD, RNY, SLR, SRV, SWK, SYD, TAP, TEN, USD, UXC, VMS, WDC, WES and WRT. This is not a recommendation. PRICES CORRECT AS AT 30 May 2014

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Special report

Of diamonds and dogs

In 2007, we ranked the Top 20 stocks in order of attractiveness. Seven years later, the difference in returns between investing in the top and bottom five was more than 50%. This time, we're again looking for the diamonds and dogs in that auspicious list.

We'll also suggest ways you could use this ranking in a very practical sense: to build a core portfolio around Australia's largest stocks.

The top 20 stocks are the most widely owned in the country. Who doesn't have a place for at least one of the big four banks, a resources giant or an owner of one of the two dominant supermarket chains?

In this report we'll not only draw together our recommendations on Australia's largest stocks in one place but we'll also rank them based on their attractiveness.

In other words, you'll see which of the two current Buy recommendations in the Top 20 we like the best and which of the three stocks bearing negative recommendations we like least. Just as importantly, you'll also see how we rank the 15 Holds in between. That all begins on page 5.

We'll also suggest ways you could use this ranking in a very practical sense: to build a core portfolio around Australia's largest stocks. That's on on page 6.

Table 1 shows ver y ef fec tively that `Hold' recommendations are far from boring. There's actually great value in understanding which of the Top 20 stocks

offer better opportunities than others, even if most of them sport this bland-looking tag. To show how, let's start with the returns from the 2007 data.

A review of 2007's ranking

June 2007 was a heady time. Harry Potter and the Deathly Hallows was about to become the fastest selling book in history and the All Ordinaries Index was a few months away from its boom-time peak. No one had heard of the GFC, although there were rumblings and worries about banking practices and derivative products.

Market observers were intently discussing three Top 20 Aussie stocks that were hovering around the financially irrelevant but aesthetically interesting $100 mark: Macquarie Group, Rio Tinto and CSL (before its subsequent 3-for-1 share split). Seems like another world now doesn't it?

In this climate we ranked the market's Top 20 stocks, not by common yardsticks like market capitalisation or

Table 1: Prudence (profitably) stuck on blue chips - results reviewed

Perf Rank

Stock

rank (2007)

2007 price (29 June) ($)

2007

2014 price/

DividendsTotal

recommendationadjustments ($)adjustments ($)Return (%)

15

1

Westfield

19.96

Long Term Buy

14.09

5.75

?1

3

2

Westpac

25.66

Hold

34.52

10.71

76

4

3

Woolworths

27.00

Hold

37.855

7.98

70

2

4

Comm. Bank

55.25

Hold

82.05

21.34

87

7

5

ANZ

28.99

Hold

33.73

9.70

50

6

6

Telstra

4.59

Hold

5.38

1.97

60

19

7

Rio Tinto

98.79

Hold

60.07

9.29

?30

16

8

Mac. Bank

85.00

Hold

64.73

16.18

?5

12

9

Woodside

45.75

Hold

42.00

9.43

12

8

10

PBL

19.60

Hold

16.26

9.85

33

13

11

NAB

41.02

Hold

33.41

12.28

11

1

12

CSL

88.00

Hold

212.28

15.97

159

14

13

Brambles

12.18

Hold

10.576

1.93

3

10

14

Coles

16.12

Hold

12.38

7.28

22

10

15

Wesfarmers

45.73

Hold

43.53

12.05

22

20

16

QBE Insurance

31.20

Better Value Elsewhere

11.32

6.73

?42

5

17

St George

35.43

Take Part Profits

45.2212

14.27

68

9

18

BHP Billiton

35.03

Take Part Profits

37.49

6.54

26

18

19

AMP

10.12

Avoid

5.30

2.23

?26

17

20

Suncorp

20.17

Sell

13.36

4.37

?12

Average29.2

II Top 5

56.5

II Bottom 5

2.8

Share advisor

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The nature of CSL's business also means it has more optionality ... With an annual research and development spend approaching half a billion dollars, there's always the chance of discovering another blockbuster drug.

revenue but by another, more useful, measure. [To see the full article, turn to page 8 and read Prudence stuck on Blue Chips ? Ed]

We placed them in order of attractiveness from a long term investor's perspective, comparing the value on offer with the price paid to secure it.

At the time, Intelligent Investor had only one positive recommendation on a Top 20 stock (Westfield), five negative recommendations and 14 Holds. But the gradation of these recommendation types into a clear ranking from most to least attractive was incredibly valuable, as the results summarised in Table 1 (on page 3) show.

The average return from an evenly-weighted portfolio of the Top 20 stocks was 29.2%, about 3.8% a year. By comparison, our top five picks based on value returned an average of 56.5% ? 6.7% a year. And that figure was achieved without the inclusion of the Top 20's best performer, CSL.

How did we deliver almost double the performance of the average returns from the Top 20? By identifying those stocks that turned out to be underperformers. Five stocks from 2007's Top 20 list delivered negative overall returns. We successfully identified three of those in the five stocks at the bottom of our 2007 ranking. They were QBE Insurance (which ranked 16th), AMP and Suncorp (which ranked 19th and 20th, respectively). Members did well simply by avoiding the losers.

We were also able to separate the better-performing big four banks from their lower-performing siblings. In fact, we almost got them in the exact order, except that we preferred Westpac (which delivered a 76% return) to Commonwealth Bank (87%). The third-rated of the four ? ANZ ? returned 50% while NAB, which was the only big four bank to miss out on a top 10 ranking, was clearly the worst performer with a paltry 11% return.

Readers may note that several of our recommendations changed subsequently. As QBE Insurance fell from being horrendously overpriced in 2007, we shifted to a more favourable view in 2010. In hindsight and after so many years of studiously avoiding it at much higher prices, we were too keen to add this impressive long-term performer to our recommended list.

Woolworths, Commonwealth Bank and Westpac also earned positive recommendations in 2010 and Macquarie Group became a Strong Buy in 2011.

These cases speak to the cycles of the stock market and reflect the nature of value investing. At the market's peak in 2007 only one of the Top 20 stocks boasted a positive recommendation from Intelligent Investor. A few years later when prices were more attractive, that number had shot up to six. Today, following a strong rebound, it's back to two.

We're pleased with the results of our previous ranking and hope that they underscore the way that your portfolio might benefit from the process of casting a value investing eye over the nation's largest stocks. You'll find our latest ranking on page 5. But first, a few observations from the results of the past seven years.

Lessons from 2007's ranking

What lessons can we learn from the results of our previous Top 20 ranking? Firstly, it's noteworthy that we missed the best-performing stock in our top five selections, but doing so didn't do us any harm.

CSL has returned a stellar 159% over the past seven years. It's a strong player in a global market which means it had, and continues to have, more growth potential compared to the likes of a big bank or a large retailer like Woolworths, all of which face a tough choice between a mature domestic market or international expansion into countries where they don't possess an obvious competitive advantage.

The nature of CSL's business also means it has more optionality. For instance, it has the potential to develop tremendously valuable products like its HPV vaccine, Gardasil. With an annual research and development spend approaching half a billion dollars, there's always the chance of discovering another blockbuster drug.

Takeovers were another theme driving performance. Both Coles and St George were in the second half of our value-based ranking but ended up being top-half performers thanks to takeovers by Wesfarmers and Westpac, respectively.

At the time Coles was playing second-fiddle to Woolworths, to the point where some analysts were questioning whether an unassailable gap was opening up between the two groups. And St George, like its regional peers, was finding it an uphill battle against the majors.

We have to be careful about the lessons we draw from these stocks, though. Suncorp was a poor performer which might have been rescued by a St George-type deal but wasn't. In short, we'd never recommend an investment on takeover potential alone. It would have to come as icing on an already attractive cake.

The results also highlight the dangers of acquisitions, which played a role in all three of the worst performing stocks.

QBE Insurance had been acquisitive, and successfully so, for many years. But a combination of a couple of lessthan-spectacular acquisitions, a turn in industry conditions and record low interest rates conspired against it.

In 2007, investors were paying more than four times book value for a company that had just posted a return on equity of 26.1%. In 2014, after two consecutive years of 7% returns on equity, investors are now paying less than 1.2 times book value. The true long-term value and returns on equity likely lay somewhere between those figures.

If QBE was partly savaged by a string of acquisitions, Rio Tinto and AMP were felled by single, large transactions. Both demonstrate the reason we've always been sceptical of such moves.

Depending on your view, Rio Tinto's Alcan acquisition was either ill-timed, ill-conceived, or both. Long the custodian of a counter-cyclical culture, the company's board performed a volte-face and authored this signature

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Special report

Not a single member of the big four banks has made our Top five this time around.

top-of-the-cycle deal. It was an ugly ride down the far side of the `commodities super-cycle' boom-time slope.

AMP's acquisition of arch-rival AXA was driven by a combination of hubris and over-optimism. The price paid demanded ambitious assumptions that conservative investors shouldn't have swallowed. Throw in a `challenged' business model involving skimming fat fees from less sophisticated clients who are gradually waking up to their alternatives and you can see why it was in a close race for last place.

Those are essentially the same reasons which drive the company's rating in this year's ranking. The business challenges remain and the dilution caused by issuing so many shares to former AXA shareholders will weigh heavily for many years.

Australia's Top 20 stocks ranked by investment attractiveness

While we currently only have a couple of Buy recommendations, a few Sells and a preponderance of Holds among the Top 20 stocks, the 2007 exercise shows the value in identifying which companies are more attractive from a valuation standpoint, beyond the gradations of a simple recommendation.

Two years ago we also had Macquarie Group, QBE Insurance and Origin Energy on the list of Top 20 stocks sporting Buy recommendations. But with the All Ordinaries index up 34% since then, value investors should expect slimmer pickings, which is exactly what we find today.

Two years ago, a quarter of the Top 20 stocks offered good value for investors. Today, the figure is just 10%. Just two stocks ? Santos and Woolworths (and we're even pushing things here as the giant retailer is trading a little above our official Buy recommendation price guide) ? are on our Buy list.

At the other end of the scale, we have Sell recommendations on AMP, ANZ Bank and Brambles. AMP has the dubious honour of being at the bottom of the table this time around while also being ranked 19th out of 20 in our previous list. Given it's down 26% over the past seven years, including dividends, it's been an horrendous performer.

We don't expect the next seven years to be as bad for AMP shareholders but we simply can't get behind a company that seems mired in a dated business model and bears all of the problems of corporate indigestion that inevitably come from swallowing your largest competitor.

You might also note that not a single member of the big four banks has made our Top five this time around. That's in stark contrast with seven years ago when Westpac, Commonwealth and ANZ occupied three of the Top five places.

On the other hand, four resources-exposed groups have made our Top five this year, compared with a big fat zero in 2007. That was the right call, incidentally, with every one of the resources stocks in the 2007 Top 20 delivering a below average return over the ensuing seven years.

We're also mindful that CSL just missed a place in this year's Top 10 and, for the reasons discussed on page 4, could easily be a standout performer again.

Table 2: Top 20 stocks ranked by value

Rank StockCode Most recent reviewReco. & price ($)Current price ($)

1 Santos

STO

27 Feb 14

Buy ? 13.72

14.55

2 Woolworths

WOW

3 Mar 14

Buy ? 36.07

37.51

3 Origin Energy

ORG

24 Feb 14

Hold ? 14.66

15.41

4 Rio Tinto

RIO

17 Feb 14

Hold ? 69.46

60.07

5 Wesfarmers

WES

20 Feb 14

Hold ? 42.89

43.53

6 Telstra

TLS

13 Feb 14

Hold ? 5.16

5.38

7 QBE Insurance

QBE

15 Apr 14

Hold ? 12.00

11.32

8 BHP

BHP

21 Feb 14

Hold ? 39.28

37.49

9 Woodside Petroleum* WPL

25 Feb 14

Hold ? 37.99

42.00

10 Commonwealth Bank CBA

19 May 14

Hold ? 80.40

82.05

11 CSL

CSL

13 Feb 14

Hold ? 66.98

70.76

12 Macquarie Group

MQG

26 May 14

Hold ? 59.87

60.33

13 Westpac

WBC

19 May 14

Hold ? 34.28

34.52

14 Westfield Group

WDC

21 May 14

Hold ? 10.92

10.85

15 NAB

NAB

19 May 14

Hold ? 33.49

33.41

16 Suncorp

SUN

27 May 14

Hold ? 13.42

13.36

17 Insurance Australia Grp IAG

10 Jan 14

Hold ? 5.85

5.94

18 Brambles

BXB

12 Sep 13

Sell ? 8.88

9.61

19 ANZ Bank

ANZ

19 May 14

Sell ? 30.56

33.73

20 AMP

AMP

10 Jul 13

Sell ? 4.40

5.30

Sell price ($) Above 20.00 Above 50.00 Above 20.00 Above 80.00 Above 50.00 Above 6.00 Above 15.00 Above 50.00 Above 45.00 Above 90.00 Above 75.00 Above 75.00 Above 40.00 Above 12.50 Above 40.00 Above 15.00 Above 6.00 Above 8.00 Above 25.00 Not provided

Buy price ($) Below 15.00 Below 36.00 Below 14.00 Below 55.00 Below 35.00 Below 4.25 Below 11.00 Below 30.00 Below 30.00 Below 55.00 Below 45.00 Below 40.00 Below 22.00 Below 9.00 Below 22.00 Below 9.00 Below 4.00 Below 5.00 Below 18.00 Not provided

*Woodside Petroleum was downgraded to Sell on 2 Jun 2014, subsequent to this rankings finalisation.

Share advisor

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If you're patient, the best approach is to just wait until one of the Top 20 stocks earns a positive recommendation.

Using Intelligent Investor's value-based ranking

Most investors have a core portfolio built around the Top 20 giants. Let's take a look at different ways that building such a portfolio might be achieved.

Imagine you had a $150,000 share portfolio and that you wanted to allocate two thirds of it to the largest 20 stocks, with the other third in a combination of second line and speculative issues. That's $100,000 to be invested in the Top 20.

If you were to split your $100,000 along size lines, you'd be investing around 65% of your Top 20 allocation across just two industries and six stocks (the two giant miners and the big four banks). Add in Telstra and you're at a 70% allocation in just seven stocks in only three industries. You can see the outcome in Table 3.

Simply splitting the $100,000 evenly across all 20 stocks would provide more diversification. The problem with that approach, or the market capitalisation-based one, is that it takes no account of investment attractiveness.

We would never advocate buying an over-priced stock simply to add diversification to a portfolio. Better to hold cash than pay more than 100 cents for a dollar's worth of value, which brings us back to our rankings and how to use them.

If you're patient, the best approach is to just wait until one of the Top 20 stocks earns a positive recommendation. Over the past seven years, that approach would have seen you accumulate a collection of six of the Top 20 stocks at attractive prices.

If you wanted to build a portfolio more quickly, you have another option. Rather than invest $5,000 in each of the Top 20 stocks, you could eliminate the bottom five by attractiveness (namely, Suncorp, Insurance Australia Group, Brambles, ANZ Bank and AMP) and `double up' on the five most attractive options by investing $10,000 in each of Santos, Woolworths, Origin Energy, Rio Tinto and Wesfarmers.

Using this approach, you'd end up with a 15-stock portfolio skewed towards those investments offering

Table 3: Portfolio of Top 20 stocks by market capitalisation

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

StockCode

BHP

BHP

Commonwealth Bank

CBA

Rio Tinto

RIO

Westpac

WBC

ANZ Bank

ANZ

NAB

NAB

Telstra

TLS

Wesfarmers

WES

Woolworths

WOW

Woodside Petroleum

WPL

CSL

CSL

Westfield Group

WDC

Macquarie Group

MQG

Suncorp

SUN

Origin Energy

ORG

AMP

AMP

Brambles

BXB

Santos

STO

QBE Insurance

QBE

Insurance Australia Group

IAG

Total

Shares (m)Current price ($)

5,337.0

37.49

1,621.3

82.05

1,861.2

60.07

3,109.0

34.52

2,744.1

33.73

2,353.9

33.41

12,443.0

5.38

1,143.0

43.53

1,257.4

37.51

823.0

42.00

478.9

70.76

2,072.2

10.85

321.1

60.33

1,286.6

13.36

1,103.6

15.41

2,958.0

5.30

1,562.9

9.61

1,000.0

14.55

1,253.9

11.32

2,341.6

5.94

Market Cap ($m) 200,084 133,028 111,802 107,323 92,558 78,644 66,943 49,755 47,167 34,566 33,887 22,483 19,372 17,189 17,006 15,677 15,019 14,550 14,194 13,909

1,105,158

Investment ($) 18,105 12,037 10,116 9,711 8,375 7,116 6,057 4,502 4,268 3,128 3,066 2,034 1,753 1,555 1,539 1,419 1,359 1,317 1,284 1,259

100,000

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Special report

This portfolio ... smooths much of the lumpiness that arises from sizebased allocations and tilts your investments towards those stocks offering better value.

better value. Table 4 Illustrates what this value-based portfolio might look like based on a $100,000 investment (being two thirds of an overall portfolio of $150,000).

This portfolio achieves two worthwhile aims: it smooths much of the lumpiness that arises from size-based allocations and tilts your investments towards those stocks offering better value. Of course, you might come up with other inventive ways to build a portfolio around our value-based ranking.

Table 4: Illustrative value-based portfolio

Rank StockCode

1

Santos

STO

2

Woolworths

WOW

3

Origin Energy

ORG

4

Rio Tinto

RIO

5

Wesfarmers

WES

6

Telstra

TLS

7

QBE Insurance

QBE

8

BHP

BHP

9

Woodside Petroleum*

WPL

10

Commonwealth Bank

CBA

11

CSL

CSL

12

Macquarie Group

MQG

13

Westpac

WBC

14

Westfield Group

WDC

15

NAB

NAB

Total

Investment ($) 10,000 10,000 10,000 10,000 10,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

100,000

*Woodside Petroleum was downgraded to Sell on 2 Jun 2014, subsequent to this rankings finalisation.

You may also prefer to be more concentrated in your approach. For instance, you might simply invest across the Top 10 stocks in our value ranking, although we'd urge you to consider 11th-placed CSL because it offers such a different risk profile to other stocks on the list.

The final point is more broadly-based. Just a few years back, large blue chip stocks were relatively cheap. Now, many are relatively expensive, as this research indicates. Before diving in and establishing a portfolio based around the Top 20 stocks, you may want to question the veracity of what has become a shibboleth in Australian investing; that the big four banks are always a good bet.

A portfolio based around the Top 20 stocks as shown in Table 3 leaves investors highly exposed to the banking and resources sectors. The value-based approach shown in Table 4 reduces this exposure considerably ? which is

all to the good ? but it still retains a heavy concentration in two sectors, with resources accounting for 35% or 40% (depending on how you classify Wesfarmers and Origin Energy) and the big banks, excluding Macquarie, which is a rather different beast, 15%.

Intelligent Investor Share Advisor has repeatedly warned members not to be over-exposed to the banking sector, largely because the macro threats Australia faces, which include 23 years without a recession, a huge slowdown in mining investment and the threat of a Chinese property bubble, are mounting.

The value-based portfolio in Table 4 meets our portfolio limit of having less than 20% of one's portfolio in the major banks. But conservative investors should halve that limit, which means the above portfolio would breach this guideline. What to do?

The first point of call is to read another special report, Time to Switch Banks. It surveys the local banking environment and gives some context to our bank portfolio limits. Then it analyses two top US banks, which, in comparison with their local counterparts, offer very good value. It's a way to retain bank exposure without taking on the risks that the local banks face.

With the Australian dollar relatively high, it's also a very good time to seek out international diversification, especially when you can buy first class, reliable businesses that you can't buy locally. Remember, too, that the US banking industry has had its crisis. That's not to say the local banks will face a moment of disaster, but one should be aware of the risks, which are probably greater than many people calculate.

The final point ties in to the international theme. By buying a conglomerate like Berkshire Hathaway, you also get far better diversification by industry, geography and currency than you do among the top 20 local stocks. And you get the added advantage of having an unrivalled owner/ operator in the form of Warren Buffett at the helm.

So, your options are broad and attractive. Many investors prefer to stick with big, local stocks and if that's you, this report shows you a way to build a portfolio that incorporates value as well as size and diversification. But if you are prepared to look a little further afield, right now you can achieve even better diversification and better value. Plus there's the potential kicker of a falling Australian dollar to boost your returns.

Share advisor

8

Prudence stuck on Blue Chips

The indomitable Prudence Warywallet is in a bit of a quandary. She feels her portfolio is a little out of kilter, but she's not getting much help with it, explains James Carlisle.

Originally publised june 2007

She'd checked The Intelligent Investor's recommendations on her large blue chips holdings, but was slightly frustrated to find an overwhelming preponderance of Hold recommendations.

`You need more in resources,' said Bert, `and a bit less in banks.'

`I see,' replied Prudence Warywallet. She felt that `need' was rather a strong word; she wasn't even sure what she wanted. `Why is that, then?'

`Resources is where it's all happening at the moment, Mrs W,' replied Bert. `The BRIC economies are growing fast and they need our raw materials. Profits have been soaring. It's all part of the supercycle. As for banks, well the internet is putting pressure on margins and we just don't think they have the same growth trajectory as they used to.'

Prudence was used to not understanding a word Bert said, but he was a nice enough boy and her father had always sworn by BusyTrade Brokers before he passed away. She generally did her own research on investments, with the help of The Intelligent Investor, and had had some success. In particular, she felt she had done well to avoid the rush into infrastructure funds (see our feature from 15 Mar 06, Prudence says no to infrastructure.) But Prudence mainly tinkered around the edges of her portfolio, leaving its blue chip core largely intact.

lopsided

This didn't appear to have held back its performance, but she was worried that it was becoming a bit lopsided in certain areas. She'd checked The Intelligent Investor's recommendations on her large blue chips holdings, but was slightly frustrated to find an overwhelming preponderance of Hold recommendations.

From one point of view, this was fine. After all, holding was exactly what she was doing. And she'd understood the point made in the feature on 30 Jan 07, Buckle down for a blue chip bonanza, that blue chips tend to present fewer obvious opportunities because they're followed so closely. But, all the same, it didn't give her much to go on. So Prudence had made her way down to Melbourne to talk things over with Bert. But Bert's jargon seemed to be ripening with age and she came away more confused than ever.

Prudence returned to The Intelligent Investor website to see what else she could turn up. She was pleased to find that, among blue chip resources stocks, Rio Tinto was a pretty clear favourite. BHP Billiton had a Take Part Profits recommendation compared to Rio's Hold, and the reasoning was clear from the articles ? `If tough times arrive, Rio Tinto looks better placed to weather the storm' she read in an update on BHP from 12 Feb 07 (Take Part Profits ? $28.52).

But Prudence had heard on the news that Rio's share price had passed $100 recently and she wondered whether the opinion still held. Remembering something she'd read in one of The Intelligent Investor's email updates, Prudence fired in a query via the Ask the Experts tab on the website:

`Hello. With the Rio share price hitting $100 recently, do you still prefer it to BHP? Also, are there any other blue chip resources stocks you'd be interested in? Thanks. Pru W.'

Soaring share prices

Prudence wasn't able to watch the Ask the Experts forum live on Thursday as it was her day looking after the grandchildren. But that night she checked back and was pleased to see her question had been answered by Greg Hoffman:

`Hi Pru. You probably remember a few years back, in 2003, when we issued a series of Long Term Buy recommendations on Rio at around the $30 mark and BHP Billiton around $9. At the same time, we were also keen on Woodside Petroleum when it was around $13 and Santos at around $6. But the price of each these stocks has soared since then. We've done very well from these investments but we're not keen to add to any holdings at what may prove to be the top of a cycle (see our feature from 10 May 06, titled A fresh spin on the supercycle).

`We do still prefer Rio to BHP. The $100 mark is itself of no significance and, though Rio's share price has been rising strongly lately, BHP's has been no slouch. Our preference for Rio still stems largely from the different ways the companies are approaching the current boom. In its 2006 annual report, BHP's outgoing head honcho Chip Goodyear wrote: "We believe the world may be witnessing just the beginning of a whole new period of change and BHP Billiton is an essential element of that change."

`In Rio's 2006 annual report, the following more measured comments came from chairman Paul Skinner: "I have warned in previous messages about the risk of complacency that can flow from a period of strong markets and sustained success. We remain alert to this and recognise the long-term cyclical nature of our industry."

`In short, Rio's conservative approach sits more comfortably with us. Though, if it really is different this time, then BHP may well do much better than Rio over the coming years.

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