FYI | Sep 28 2016
By Peter Switzer, Switzer Super Report
Back around March when we were coming out of the early 2016 stocks sell off and small-caps and mid-caps were shooting the lights out, I posed this question: was it time to opt for the contrarian play of buying the top 20 stocks? For two years, they had been laggards, compared to their smaller rivals for ASX capital, and that’s why I asked the question.
Of course, given the way I invest — primarily quality companies that pay dividends — it was an easy question to ask, as market players had put many of these top companies in the reject basket.
Have a look at how most of these stocks have performed over the period (March to now):
- BHP (BHP) $14 -$21
- ANZ (ANZ) $22-$27
- Woolies (WOW) $21-$23
- Macquarie (MQG) $58-$82
- Telstra (TLS) $5-$5.19
- QBE (QBE) $9.60-$9.60
- Brambles (BXB) $10.20-$12.12
- AMP (AMP) $5-$5.34
- Suncorp (SUN) $10.60-$12.65
- IAG (IAG) $5.10-$5.52
- Scentre Group (SCG) $4.20-$4.74
- Transurban (TCL) $10.75-$11
- Woodside (WPL) $25.50-$27.32
- Wesfarmers (WES) $39-$44
I’ve left the other banks out because they did well over that time, after being beaten up like many of the banks around the world. But this story is pretty relevant now as there’s a trend emerging that says you have to dump expensive defensives, which is how many of these stocks are often seen.
There’s also a swing towards growth stocks and that’s why resource stocks have been on a tear higher. Right now, a stock like BHP has a target of $25 with some analysts, while coal prices are defying the doomsday merchants, who said it was a dead as a dodo commodity.
I suspect a lot of the REITS and companies such as Transurban and Sydney Airport will be under selling pressure, as they have been in recent times. However there will be buying opportunities for those of us who can live with periods of capital decline for the sake of income.
Stock market ‘experts’ talk to the investing community as though they’re all the same guys and gals but in fact, they’re different. If you believe people will stop using Sydney Airport or stop driving through Transurban tunnels paying fees that most of us don’t even know the amount, then don’t look at this stock as its share price falls. If you believe, however, that these are good, sustainable companies, then as the market chases growth stocks and dumps these more defensive plays, an investor chasing income can be a beneficiary.
Ironically, I always argue that you don’t buy mining stocks for income but those who, as contrarians, bought BHP at $14 will get a nice income yield. And there’s a lesson in that for all of you out there who want to play stocks for income.
Clearly, we want both but you need to get your focus right. What’s more important to you? Is it a steady flow of reliable income or the need to see your capital always go higher?
As I say, getting both is always better than a temporary capital loss offset by reliable income but you need to work out your priority.
The bottom line is that when markets get on a trend, the fund managers who might have been very defensive and chased stocks like Sydney Airport can now dump them to buy stocks that will spike.
This creates buying opportunities for yield hunters. The smarties in the market say “the hunt for yield is over”. Well, it might be for them but not for me and others like me, who can wait until they see a great deal on a great company that consistently delivers profits and dividends.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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