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Weekly Analysis

Commodities: The Nature Of The Beast
FNArena News - October 27 2011

By Rudi Filapek-Vandyck, Editor FNArena

To most investors, BHP Billiton (BHP) is pretty much the same as Woolworths ((WOW)), or Westpac ((WBC)), or Telstra ((TLS)). They're all listed blue chips, it's just that BHP's major growth engine is different while the others, Telstra on top, pay a higher dividend. Alas, nothing could be farther from the truth.

As consumers we find it logical to pay attention to intrinsic differences and we probably never question them. Some shoes are for rock climbing, others for running, others for ball room dancing. Unless we're aiming for a prank, we never take our rock climbing shoes to the ball room or vice versa. In a similar vein, a Porsche 911 is ideal for pushing the pedal to the metal on a race track but we would never consider it for traveling via unkempt dirt tracks in mountainous Afghanistan. Usain Bolt is the world's fastest man on the 100 meters, but don't ask him to run a marathon (he probably can do it, but it won't be very good).

Why is it then as investors we tend to treat all listed equities as roughly the same, only dividing them along rough lines of "growth or no growth", "cheap or expensive"?

Surely, just like shoes are intrinsically different, leading to different choices under different circumstances and for different purposes, the same also applies to listed equities?

I think it does. To stick with the themes mentioned in previous paragraphs: I think energy and mining shares are like a Porsche 911, or like Usain Bolt, or like Bolt's running shoes; they're the best choice around when the sun shines, the wind blows in our back and we need to cross the distance ahead in a minimum amount of time. But when darkness falls, the temperature drops sharply and the road becomes rough, filled with unforeseen bumps, holes and barriers, those speedy fastrunners become of little use.

This is how I see listed equities; I try to judge them by their inner character. This is a fast runner. This is a long distance performer. This is a wannabe. This is a has-been. There's also the come-back kid, as well as the growing up teenager, the listless elderly and the misjudged eternal underperformer... Next thing to do is not trying to force Usain Bolt to compete with Ian Thorpe and leaving the sportscar behind when we travel through the heart of Afghanistan.

There is one simple way to illustrate my point. Below are EPS growth achievements from the past three years for a selected number of companies. To show that my inner character analysis extends beyond mining and energy stocks, I have included Qantas which I simply regard as "non-investment grade" by default. In my analogies, I find Qantas of questionable quality even as a short distance runner. Amongst athletes, the name that most comes to mind when thinking about Qantas is Steven Bradbury. To complete the picture, and show how I try to judge these stocks, I have added consensus forecasts for the next two financial years (current year and following one):

ANZ Bank ((ANZ)) Past: -28% / +30% / +8.6% // Forecast: +5% / +4%

BHP Billiton ((BHP)) Past: +3.5% / -32% / +75% // Forecast: +11.5% / +6%

Santos ((STO)) Past: +30% / -67% / +98% // Forecast: +2% / +2%

Coca-Cola Amatil ((CCL)) Past: +12.5% / +11% / +9.3% // Forecast: +8.9% / +9.9%

Qantas ((QAN)) Past: -82% / +9.7% / +52% // Forecast: +84% / +27%

It goes without saying that profit achievements, or forecasts, are not necessarily the best guide when it comes to share price performances or even total investment returns. BHP shares are now down circa 25% from their peak in late April this year (and that's after a mini-rally from lower levels). The shares are down 20% since January, still below price levels from January 2010, but up more than 84% from late 2008.

Coca-Cola Amatil shares, on the other hand, are up 12% in 2011, plus they pay out more than 4% in dividends. The shares have appreciated more than 70% since bottoming at $7 in 2009. Also, and this might have escaped most investors' attention, Coca-Cola Amatil shares are today up some 20% since the share market peaked in November 2007. The ASX200 index is still down close to 40% from its comparable peak level.

Shares in Santos are still off more than 25% from this year's April peak, the share price has hardly gained anything in comparison with where it was at the start of 2006 (more than 5.5 years ago) but there have been rallies of up to 50% in between!

I think this short summary in share price performance says it all; when the sun shines, you want Usain Bolt in your team ("investment portfolio"), when rain, hail and thunder reshape the dirt road ahead, you're probably better off without him. After all, Santos hasn't exactly been paying great dividends since 2006 and the company will pay out even less in the years ahead as capital is needed to fund the major capex programs ahead.

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