Get Big Value in Big Caps
Under the Radar Report’s Richard Hemming tells you how you can boost your portfolio’s returns using a combination of Small Caps and Big Value.
Richard Hemming on Big Value
WHAT IS BIG VALUE?
I’ve always been interested in looking at big world events and how they impact upon the macro environment, which includes global stock markets and the ASX in particular.
When I saw the Asian currency crisis unfold in 1997 there was no way I was going to plough any more money into ASX listed companies. It took some time for the global economy to regain its footing after the loss of value caused by large scale industrialisation, which wasn’t matched by increased consumer spending.
BIG VALUE CAN MEAN BIG WINDFALLS
Value did emerge and I was Johnny on the spot to hoover up some of the best value and subsequent returns on the stock market I’ve ever achieved. Later that year I got as much of Telstra’s first instalment as I could. That price was $1.95 and I ended up selling that stock for well over $8. I topped up my investment in CBA, having procured some of its IPO. I paid up about $15 as I remember. As you would be aware, that stock is now over 5 times that value and has returned more than 10 fold when you include dividends.
Just after the collapse of Lehman Brothers one of my colleagues at Under the Radar purchased a stake in TPG Telecom early in 2008 – right in the middle of the financial crisis. His purchase price was less than the company now pays out in annual dividends per share.
HUNTING FOR VALUE BOTH HERE AND ABROAD
Our new “Big Value” publication exists because we analyse big events and what they mean for the ASX listed companies and also for some select international stocks. Members of our team are based in different locations around the world, which gives us another advantage at seeing different points of view.
Our biggest advantage is that we are on a constant hunt for value. We look for Small Caps, or those ASX listed companies with market caps of less than $500 million, which are trading at value prices, but which have an out look for growing profits. This is no different at the big end of town, where we are also looking for value.
THE WIDENING VALUE DIFFERENTIAL
Right now growth stocks, or those companies whose earnings are growing at a faster clip than the economy are trading at a very big premium to their historical average. Two years ago the average price to book ratio for these growth companies was four times. Fast-forward to today and it’s six times! In contrast, those stocks which don’t have any growth factored into their earnings are unchanged, trading at close to one times their book value. The differential has widened, principally because of low interest rates. We think it’s time to take advantage.
ASX FOCUS: WHAT DO WE THINK OF TELSTRA?
As I said, in Big Value, we spend our time hunting for undervalued stocks on the ASX and in the huge (yes, huge) offshore markets. We focus on specific events and then drill down on what they mean for investment markets and where the opportunities are. In our first issue we look at the upcoming deluge of spending on US infrastructure and what that means for big ASX listed companies like Boral and Transurban. We also look closely at Telstra, which has the market pretty confused right now. Is it time to step in, or is the stock a value trap?
As you know, Small Caps give you that necessary boost to your portfolio’s returns and we advise owning seven to 10 Small Cap stocks. Most of your portfolios will include stocks like Telstra and the banks, where there can also be value at certain times. With that in mind I commend to you our Big Value Portfolio, which is run by an experienced and highly accredited strategist Sam Ferraro, of the investment consultant Evidente.
WHO IS SAM FERRARO?
At under the radar we specialise in bringing the institutional world to the individual investor and this is definitely the case with Sam Ferraro, who makes a living giving advice to a select number of domestic and offshore fund managers. He has a background in economics and has also run money for a big fund manager after some 20 years as a senior strategist at JB Were and Goldman Sachs.
BIG CAP, BIG VALUE PHILOSOPHY
In the first few issues Sam takes you through the process of setting up your own big cap portfolio. We go through the top down analysis and the criteria that he uses to select stocks. He looks at price to book, whether a company is going through a capex hump and the importance of looking through accounting based earnings and finding out how good a company is at returning cash from its assets.
BIG VALUE PORTFOLIO
What we end up with is a high conviction portfolio of 15 to 25 stocks whose aim is to outperform the market. We’re all here because we want to do more than simply park our funds in a Vanguard fund, and achieve returns of better than 10% a year. This is what Sam wants to do, and this is what we at Under the Radar are striving to do with a combination of Small Caps and Big Caps.