Stock Tips: New Zealand

Three companies I like on the New Zealand Stock Exchange at the moment are:

1. New Zealand Refining (NZE: NZR)

Their current price of NZ$2.10 looks good buying. This company refines 70% of fuels used in NZ, including the majority of the diesel and jet fuel. It's been around a long time and always delivers for its shareholders which include a couple of large oil companies (Mobil and BP). Yes, I own shares in NZ Refining.

2. Mainfreight (NZE: MFT)

From their humble beginning in the 1970's, Mainfreight has come to dominate domestic NZ freight services and they now have global reach. They have a high P/E and that may put some off, but the company rarely puts a step wrong. No, I don't own this one, but nevertheless it's a good company.

3. Steel & Tube (NZE: STU)

They do as the name suggests, supply steel and tube. Why such a low share price? They've been having trouble over steel they supplied that wasn't to grade. Nothing wrong with the steel mind you, just not as labelled. They've taken a hit as a result. I like companies that take a hit but with nothing wrong with the underlying business itself.

Smiths City Group (NZX:SCY)

I am a shareholder in Smiths City Group, the New Zealand Stock Exchange listed retailer. It is a long established business that has had its ups and downs over the years, but generally it could be relied on to return a reasonable dividend. That changed recently with the suspension of a dividend off the back of reported losses. What's going on over at Smiths City?

I'm not happy with the direction the company is taking and I won't be changing my mind on that opinion any time soon. That's because it's been downhill for a while, at least 10 years or possibly longer. I put this down to one simple factor: they do not know what they are doing.

Harsh you might say. Possibly, but reading their latest Annual Report prompted me to make this post. The report, replete with typo's, has a schizophrenic feel to it; on the one hand talking about its 100 years in business and the next minute about all things fresh and new. The problem with the company is it has moved away from what it was good at to riskier business that it has never been good at. Don't they realise this and why go toward an area of business they've demonstrably failed at in the past?

If we look at Smiths City from the old days; it was a boring business that looked after the locals. They sold trade tools, hardware, appliances and some home furnishings. Included in that list was the auctioning and trading in secondhand goods. They were actually quite good at all this and Smiths was always the place for a bargain. What was Smiths not? They were not trendy, or fashionable, or up-market. Their brand is irrevocably linked to trade, blokes, bargain hunters. That's it.

Now what are they doing? Investing heavily in their on-line presence, and store fit-out, and overall branding trying to impress on customers that they are now good looking. Right, good luck with that one.

Much earlier they got rid of their hardware, a steady earner, I've lost count of the number of times over the years that I've been in Smiths amongst the tools to discover a father with his child buying tools for the first day on the job as an apprentice. Smiths has lost that loyalty amongst customers and is chasing dreams in Auckland, a notably fickle market, where Smiths can only be seen as dead naff.

Then they'd bought the Wellington business of LV Martin, a local appliance retailer, and re-branded it Smiths City. Do they not understand that Smiths is generally openly laughed at in Wellington while LV Martin is loved? Yes, Smiths are that stupid.

On-line presence is really not that important for Smiths. They used to specialise in locations where the locals have few options, buying online means waiting days or even weeks and when it arrives it will be damaged. Or just go down to the Smiths store and Bob's your uncle. This store does not have to be flash. So what do they do? They spend on flash fit-out everywhere.

The problem they're faced with is the amount of money required to prove they're now sexy. This is way out of proportion to what they'll ever make from actually being sexy, presuming they can actually reach that goal.

What they should be doing is rather simple. Remember what they're good at, and do that often. At the moment they've forgotten about it. Then add bolt-on acquisitions that are aligned and don't spend outrageously trying to tart things up. I'm thinking farm supplies, trade tools, builders supplies, maybe some agencies on valuable imported lines and so on. And get back to secondhand and even auctions to boot. Business in Auckland and everything stylish is a mirage.

Portfolio Performance

It's been a year since I posted my portfolio on this blog. As a whole the portfolio is up 54%, with Oshkosh up 107%. Two other favourites of mine, Trinity Industries and Caterpillar are also up more than 70%.  If you want more picks like these then I suggest my readers subscribe to the Stock Tip Hotline.

Check out the portfolio here http://www.siliconinvestor.com/portfolio.aspx?fid=521

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Pyne Gould Corporation: Free Advice

I am a shareholder in PGC (NZX PGC) and have been so for quite a long time. It is my worst stock and I'm not afraid to say it, I don't always get things right.

What are PGC up to now? They're into distressed assets these days and currently own land which they're developing and selling for house construction. When I invested they were mainly a lender and owned Marac Finance (now part of Heartland Bank).

Here's my advice: get out of property development. There are many good reasons for not becoming a land developer but the most important can be summed up in two words - cash flow. That's right, cash flow is king and developers regularly have little of it.  Hence the saying, always an investor never a developer be.

PGC have got cash, don't plough it back into real estate that may never sell. Invest that cash in good solid businesses instead. Will they listen? Unlikely, but heh, we all live in hope.

Case Study: Martin Jetpack vs Fletcher Building

I often get asked, what do I avoid when investing in a company. My answer goes something like, I avoid dogs and lemons. Which brings me to these two companies, Martin Jetpack and Fletcher Building. They're both New Zealand businesses, the former being listed on the Australian Securities Exchange (ASX MJP), while the latter is listed on both the ASX and NZX (ASX FBU).

First things first, Martin Jetpack is not a jet. It's a contraption which one pilot flies while strapped into. The product can best be described as hype. An early version of the contraption flew at Oshkosh in 2008 and I'm informed the reaction from onlookers there was a wide yawn. They'd seen this before with the SoloTrek XFV which flew back in 2001 some seven years earlier.

The inventor wanted everyone to believe he'd worked on his flying thing for 30 years from his garage in the suburbs of Christchurch, but this assertion was never independently verified. It is truly incredible to think that shareholder money went into this thing. It has yet to enter commercial production and I'm not even sure if anyone outside the company has flown it (put under independent scrutiny). My bet is it will never enter commercial production and if it does the company will promptly go bust as it is a silly proposition with little or no practical use.

Then we have Fletcher Building. This is a large business which carries out wide scale construction projects, and it is NZ's only locally based manufacturer of cement. When the Christchurch earthquakes hit, the only company capable of a rebuild that big was Fletcher Building.

You know Formica, everyone knows what Formica is, well Fletcher own it, and Laminex as well. Get the idea? Fletcher has fingers in many pies. Having said this though, Fletcher does tend to underperform and that's why I own no part of it, but that could change, and here's why: its share price fell 10% in one day on Monday and continues to fall. This is because of a profit downgrade due to cost overruns on two large projects. Construction is a risky business and they've been burned. But heck, 10% off the value in one day?

That's right, completely silly businesses like Martin Jetpack, which has never made anything useful and likely never will, ride up to $1.25 highs then plunge to 14 cents today. Then a solid company like Fletcher is punished harshly for business as usual.

What I'm saying is the market overreacts. It panics on bad news and gets all excited about hype. All commonsense seems to fly out the window. Fletcher Building are a solid buy, Martin Jetpack a joke.

Kaikoura Earthquakes: Bring Back Ministry of Works?

Chris Trotter is proposing New Zealand re-create the Ministry of Works, given the monumental clean-up required after the Kaikoura earthquakes:-

>>Read about it here<<

It's a good idea, the old MOW should never have been sold off. The NZX-listed Opus now claims to be a direct descendant.

Back when the original MOW was established, there were very few of those newfangled bulldozers in the country. Now there are, and there is no shortage of earthmovers, civil engineers and contractors.

What is more needed, and Trotter does not directly address this, is a fully prepared disaster relief agency, which I propose we roll into the defence force. Such an organisation would have bridges, water purification and desalination units, temporary accommodation and the like, paramedics and hospital supplies, with the ability to get ashore in New Zealand or in the Pacific Islands.

Then with the disaster relief in place, proper planning can be undertaken and reconstruction carried out. With the events in Kaikoura, you just know that right now, not a lot is being done by the government, they're just as likely to permanently close State Highway 1 through Kaikoura.

Advantages of Investing in Stocks

New Zealanders are obsessed with real estate. Apart from a few savings in the bank, that's about all they invest in, be it their own home or home plus other property as an investment. Residential rental makes up a large proportion of the latter.

With the just announced bank restrictions on financing available to investors, it's possible they may look to the share market. If they do, there are several advantages over direct personal investment in real estate:-

1. It's a relatively passive form of investment (this is not to say you turn your brain off and don't let the company know what you think). With real estate you need to be concerned about maintenance, paying rates, insurance, making mortgage payments, finding tenants - the list goes on. 

2. Gains can be outstanding and so long as you don't buy with the intent to sell, then like real estate investment the capital gains are tax free. With real estate, over time, the gains are definitely there, but do those gains all occur within a year? You can do that in stocks. But like deciding which property to buy you need to do your research and be satisfied that the company you're investing in, and becoming part-owner of along with all those other shareholders, is well managed and has prospects. 

3. You can adjust your portfolio and do it easily. By that I mean, if you own the shares, you can sell as many of them as you like if you choose to (any marketable parcel). Can you sell half of that house you rent out? Or sell doors and windows? And if you can you need to get your hands dirty, and if selling the building you need a lawyer and likely an agent. Then if subdividing the property there are tax implications.

4. Income from dividends, return of capital, bonus issues and dividend reinvestment schemes make the returns often better than real estate.

Think about it, but beware, I think the most important thing is to be disciplined. The share market is a roller coaster and you need to think for yourself and be prepared to go in the opposite direction to the herd. That is, buy when everyone is selling and sell when everyone is buying.

An example of what is possible:-

ASX Bradken (BRK)

Jan 21 - they were at Aus$0.38 

Jun 9 - they closed at Aus$1.22

You'd find it hard to triple your money in months in real estate. Some bright spark will point out, no doubt, that the above company is losing money and having to restructure. And they'd be right. But think about this, the company is not going to disappear overnight and if it fails will be gobbled up by someone else. It's a pretty solid company, not fly-by-night stuff.

Our bright spark will rightly reply that with investment real estate, you get the advantage of mortgage gearing and the tenant pays off the mortgage.  How does mortgage gearing work? Well, the lender is not participating in the asset, they're just lending the investor money and charging for it while keeping the real estate as security. If you buy a $450,000 house and put in the minimum amount of equity, say, $135,000 and the property rises 10% in value during the first year, you book a $45,000 profit (at least on paper). Rounded down that's a 33% return on that $135,000. All the capital gains are yours.

This all sounds good and it looks like real estate is by far the better bet. But think about this - while things are going great, real estate is a sure-fire winner, but as an investor it is you with everything on the line. If the market tanks, you still have that mortgage to pay back. If you can't find tenants, tough, you still have to pay the mortgage. Everyone thinks of the times when things are going great and they never think about what may happen if things go wrong.

I think this is where investing in the companies listed on the share market comes into its own. If things go bad, you have no ongoing obligation to anyone so long as you haven't borrowed to buy those shares. You may have to forgo a dividend, or wait for the company to recover, or even sell at a loss, but that's where your obligations end. The company may ask for a further contribution, a rights issue, but you're never compelled to invest in those (they're often a very good idea by the way).

If we go back to our $135,000 equity example above, it's hard to get that 33% return on the share market across the whole portfolio. But get this, you also have far less risk than with real estate. If you apply the time honoured principle of compounding your investment, by reinvesting capital gains when realised, participating in dividend reinvestment schemes, buying shares offered in a rights issues, and taking your dividend income and reinvesting part of that (I'm assuming at least some of the dividend income is used to pay expenses, such as brokerage when due), then I'm sure returns can be better than real estate investment.

Whatever you do, my own experience of using advisers is they're often useless. My advice is use your own research, like you would when buying a house, know the market and what you want. What company do you like and why?

New Zealand Investors

I've been thinking long and hard about the Auckland house price inflation. The banks have a role to play, they're willing to lend on real estate almost exclusively. But the way the New Zealand investment landscape is structured also has a major part to play.

Broadly speaking a New Zealand investor has three options:-

1. Buy investment real estate,
2. Start or buy a business, and;
3. Invest in shares, bonds, bank deposits or government stock - passive investment in other words.

Before any of the three are implemented, paying off debt must be a priority. Assuming that is achieved (at least substantially), and the investor maintains a sensible retirement superannuation account, then the three options present themselves this way:-

1. The investor buys houses or residential flats and apartments. The ideal is to invest in industrial and possibly commercial real estate, but the reality is residential purchases are easy to achieve. It's easier for a small investor to get their foot in the door with residential property. For starters, they needn't be registered for Goods and Services Tax (GST).

2. Buying or starting up a business is limited by the experience of the investor and the size of the market. Some people can't run a business or they don't have skills in the right areas to do so. It's a risky option for most.

3. Then lastly, they can access the New Zealand and Australian stock exchange listed companies very cheaply and easily. They only pay tax on those gains that are realised (if long-term investment then only the dividends are taxed). Outside of that however, if the investor buys shares in companies listed on the NYSE, Nasdaq, LSE, Borse Frankfurt or elsewhere, then over a certain threshold they'll pay tax on gains when they occur, not only when realised.

Conclusion:

Investors are strongly encouraged to invest in real estate, which has to impact Auckland house prices, given the size of that market. Investors cannot start or buy a business as the opportunities are scarce, given the relatively small scale of commerce in New Zealand. Allied to that, investors are discouraged from spreading their net wider, effectively limiting their share investments to the local scene. No wonder then that investor money pours into Auckland housing and real estate in general.

Recommendation:

Allow investors to invest in shares outside of New Zealand, on the same basis as they invest in shares listed in Australia, that is, invest in any company listed on recognised exchanges in the USA, Canada, Japan, the U.K., and Germany (elsewhere by approval). By doing this, money would be diverted from the overheated Auckland housing market. The effect would be to lessen demand for Auckland houses, and prices would stabilise.

(The change to NZ's tax regime regarding investment in foreign shares has had a knock-on effect to the Auckland housing market. This is the law of unintended consequences)

Edit to add (off the topic but looking at investment as a NZer investing overseas)...

The following NZ Herald article traverses many of the issues a NZ investor faces when investing overseas...http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10738730

The article mentions hedging, and what I've done in the past is not very sophisticated but effective, I've maintained a US Dollar account with a NZ bank. You're not dealing with a foreign desk, but the money is effectively offshore. Many people do not realise they can have a US Dollar account with a NZ bank. The good part of this is you get higher level people within the bank with better advice attached (the down side is that over a certain amount your name gets on lists in New York and you'll be bugged by investment houses on Wall Street. This is a freedom of information thing, I recall an outfit by the name of Whale Securities was one such calling all the time - look them up they were on Wall Street - you have to develop a thick skin and know how to say no).

Most 'experts' recommend using funds, such as unit trusts. My experience is they don't do that well. I'd guess my returns over a 20 or more year period would be about 1% annually going down that road. Don't be sold unit trusts.