The US sub-prime mortgage crisis has prompted the Australian Government to consider tightening regulation of the nation's lenders. A parliamentary committee has identified a need for stronger regulation of the lending sector, to ensure that predatory lenders do not cause a liquidity crisis in Australia. The committee has recommended giving the Australian Securities & Investments Commission the power to prosecute predatory lenders who prey on vulnerable consumers. The mortgage industry has welcomed the proposed changes, however the Financial Services Union has some concerns
Someone has to stop people lending money to those who can't afford to pay it. But it is the consumers fault in the end and I don't think we can lay blame on the lenders. Consumers should know whether or not they will be able to afford the mortgage they are getting into, I don't like the current "victim" mentality around the place that a lot of borrowers are taking.

It is their OWN fault if they did not anticipate interest rates rising.

This has caused so much instability in the market there may be a few good buys out there but they are still few and far between.

Good luck

Ross Human Directions Limited - BUY

Hi everyone,

My next purchase since JUM has been Ross Human Directions Limited (ASX:RHD).

The reasons I bought this stock include :

Technical bowl poattern forming in chart.
PE ratio is at 8.6
PB ration is under 1.5
PEG ratio is 0.5
Dividend Yeild is 7% fully franked
PS ratio is 0.16 ( Price to Sales )
EPS are forcast to grow by more than 10% for the next few years
The price is under $1.00
Debt levels are at maageable levels (29%)

Also they have had record profits recently.

I got into this share at 62c but I would suggest it is still a good buy up to 65c.

Of course this is just what I did and is not a recommendation that you buy the share as I do not know your financial position :) ...

Good Luck.

Record breaking day

Rio Tito (ASX:RIO) hit the $100 martk yesterdeay in what was a historic day for the ASX.

Its the first share to make that price and although it slipped back before the close it was still a record breaking day.

RIO has been spurred on from the resources boom.

Mind you there are a number of other shares which could have hit that mark already had it not been for share spilt. Harvey Norman (ASX:HVN) comes to mind.

Good luck

KME and WAL lead portfolio in poor day on market

I bought KME today.

While this has been a selection of mine for a while (bought in at 81c) I think now is a good time to top up the account. The PE is currently sitting at 16 which is high for stocks that I purchase. But the federal budget incentive plus the long term uptrend say this is a raging buy.

I bought in today at $1.395.

Another share which I am still raving about is WAL. I initally bought in at 22c and bought more at 20c and then 17c. It has returned to 20c and I am showing a small profit. When this company decides to do something with the cash it could be a big mover.

Good luck.

Another Great investment at only 2.4c (well I think it is)

I found another share which I just bought into on Monday.

The share is JUM.ASX

It is an interesting company that makes its money from gambling ( so no good for those of you who don't like gambling stocks). There were 2 big draw cards for me with this stock. The first being the amazing run of record profits. The second being a wise investment by management to buy back up to 10% of the shares on offer. This will greatly improve the EPS.

Another big draw card was the low cost to get into this share. It is only 2.4c

The price earnings is sitting around 10 so it is not overvalued at all. Combine this with record profits year to year and you have a great share. This one reminds me of my (still current) investment in ASU. This stock has potential....

Good Luck

WAL - Wavenet

I found a company worth buying because of a number of reasons.

WAL.ASX - Wavenet is a very special buy.

When you look at the company you will notice several things.

1. The company has 9.4 million in the bank.

2. The company only has a capitalisation value of 10 Million.

These two lines should signal something straight away.... They are worth only $600,000 more then the money in the Bank. This is made up money, this is actual money in the companies bank account.

Lets have a look at their reports and we see that the first half of this year they produced a profit of 1.3 Million. Lets assume they make a profit of 2 Million for a full year.

So now we know

The company is worth 10 million.

The companies has 9.4 million in the bank.

They are going to make approx 2 million a year.

Does this not scream takeover opportunity. Someone could buy this company for 15 million, and pull out 9 million from the companies bank account (so effectively they have bought the company for only 6 million). They then own a company producing 2 million a year which they bought for 6 million ( that's a return on Equity ROE of 33% ).

Of course I have simplified the maths above and I assumed a takeover premium of 50%. Lets say the takeover premium is only 20% and you find the Return on Equity increases to 66%. Even for a respectable return on equity of 10% the company could be bought at a premium of only 100%.

The other option for this company is to use the money for an acquisition. Regardless of what happens the share price is going to move and its only going to move one way for this under priced stock and that is UP.

Good Luck.

Market Above 6000

I know this is a late post but congratulations to traders for pushing the market over 6000.

No matter where you look these days analysts are stating that the market is approaching full value, is fully valued or is overvalued. I am one of the analysts saying the market is definitely overvalued.

The market is trading at a PE of 17 which is higher than the adjusted ( for booms, crashes) PE range of 14.5-15.5. This means the market is overpriced by at least 9.6%

I have also been reading that people were amazed at how quickly the market shot up 1000 points. This is only 20% and the last year has been a good year for the market. It took 11 months to make the range.

Anyway lets hope for some sideways movement or even a bit of a decline as the market is defying gravity at the moment. And as they say the further it goes up ... the further, and quicker it drops.

Good Luck Investing

PeopleBank

I bought PeopleBank Australia Limited (ASX:PBA) today after some research last night. I spotted it due to its dramatic fall in the last few days and its subsequent rebound. There was also a good review on Grow your Egg which follows:

Peoplebank (ASX: PBA) is a technology contracting and placement company which
has been listed for around a year. Its share price was near an all time high and
there was no warning of bad news to come. It announced yesterday that because of
changes in product mix, its performance for 1H 2007 would be impacted. The
announcement was a little light on detail and the stock got hammered. They were
forced to put out a second announcement which tried to reassure the market that
they were still on track as a solid growth company.

The company is is engaged in the provision of information technology and telecommunications (IT&T) contracting and recruitment services. Contracting services represented 97% of the Company's revenue during the fiscal year ended June 30, 2006 (fiscal 2006). These services entail the provision of IT&T contractors to the Company's clients under labor hire contracts for an average length of 3 to 6 months. Typically these contracts are renewed depending on the length of the IT Project, with many contractors remaining with the same client for 18 to 36 months. Recruitment services, being the traditional placing of permanent staff with clients for a placement fee, represented 3% of the Company's revenue in fiscal 2006.

There were some interesting statements in the second announcement which included :

• The primary contracting business grew approximately 15% in the 6 months to 31 December 2006 with a very high quality customer profile.


• The combined NPAT as a result is expected to be about $1.85 million, 5% less than comparative 31 December 2005. (Yet the share price fell 30%. Overreaction ... you decide!!!!)


• Projections are for a stronger second half of the fiscal year.


• Director forecasts and market conditions indicate full year profit results will be ahead of last year.


• Peoplebank has a strong balance sheet, and anticipates no changes to its dividend policies. (Dividend yeild is 4.9% fully franked)


• Peoplebank considers itself very well positioned within its industry and is actively pursuing opportunities.


• The Directors confidently consider Peoplebank to be a growth stock and are committed to delivering quality earnings to shareholders.

Along with the low P/E of 11.5 at this level. Its earning growth last year was 20% and while I expect it to be a lower increase this year I still expect it to continue to grow for future years.

My initial stock price target for this stock is around $1.50. When it hits this level I will reevalue my holdings.

Good Luck Investing.

Magazine Tips and their effect on shares

As any good investor should and would do, I read the various stock market magazines that are available. This includes the free ones which circle the web to those which are purchased at the newsagent.

One of the magazines I regularly read is the "SmartInvestor". I find a number of longer term tips here which prove to be profitable. Apparently others are catching onto this as well. I didn't get a chance to look at it early this month and only got to it this weekend. I usually grab a highlighter and rummage through the pages looking for fundamentally sound companies that are being touted as the next big thing. I then use my own judgement on whether or not the company is a worthwhile purchase.

This month I highlighted the following stocks for the following reasons :

Brambles Limited (ASX:BXB) : The company is debt free, the balance sheet is undergeared, possible takeover target, rapid organic growth, high rates or return on capital.

Reckon Limited (ASX:RKN) : Operates in a duopoly, More than half its income is from recurring revenue, strong earnings growth, trading at a discount.

Q Limited (ASX:QXQ) : Market capitalisation understates its potential.

Austin Engineering Limited (ASX:ANG) : Surge in workload, EBITDA growth near 40%, management confirmed at least 40% growth for 2007, lots of cash reserves, Price to Earnings of 9.

Phosphagenics Limited (ASX:POH) : Insulin through skin product, P/E ratio of 10.

Mariner Bridge Investments Limited (ASX:MBR) : Great management, possible strong returns, nice trend in chart.

Adcorp Australia Limited (ASX:AAU) : Share price has halved, established provider, conservative price earnings multiple, 11% yield, Low growth outlook set to change, strong cash flow, debt free, acquisitions possible.

Allomak Limited (ASX:AMA) : In LPG industry as a wholesale supplier of LPG kits, Reaffirmed earnings guidance of at least $4.2 million, PE of 8.4 and dividend yield at 8%.

Structural Systems Limited (ASX:STS) : EPS at least 22c, PE of less than 10, significant discount to peers.

SP Ausnet Limited (ASX:SPN) : Fat dividend yield of6.63%, Should be in top 5 yielding companies for 2007/2008.

This is a list of 10 shares which I saw potential in after looking at the magazine. It usually takes me about 30 Min's to get through the magazine and identify the top stocks worth looking at from a fundamental perspective.

So how did these top 10 stocks go ?

The magazine comes out on the 15th Jan 2007. So if we assume we bought at the opening price on the 15th and held till today :

• BXB - Purchase at $12.82. Now trading at $13.31 (3.8%)
• RKN - Purchase at $1.02. Now trading at $1.08 (5.8%)
• QXQ - Purchase at $0.039. Now trading at $0.057 (46%)
• ANG - Purchase at $0.97. Now trading at $1.30 (34%)
• POH - Purchase at $0.335. Now trading at $0.34 (1.5%)
• MBR - Purchase at $2.57. Now trading at $2.50 (-2.7%)
• AAU - Purchase at $0.54. Now trading at $0.645 (19%)
• AMA - Purchase at $0.42. Now trading at $0.48 (14%)
• STS - Purchase at $1.72. Now trading at $1.94 (12%)
• SPN - Purchased at $1.40. Now trading at $1.415 (1%)

Nine of the ten stocks finished in a profit. The majority of stocks were even higher then the current prices but had declined in the last few days after spiking earlier in the week.

The profit on some of these shares is remarkable. The highest was an astounding 46%. The lowest was a meager loss of 2.7%. Five of the ten stocks produced more than 10% profit. The average profit was 13.44%. This works out to be a return of approx 161% a year.

Lets assume this works every month (I can't say this is true as I have only got a couple of months of data). Lets also assume you could make a rough 10% on your money which is a 3% discount to this months result. Compounding this through a year actually produces a result of 213% return. Assuming you start with 10K and invest evenly every month you would reach 100K within 2 years 1 month. You would reach a million within 4 years 1 month.

Is it worth following ... well the small amount of research suggests there is a case to follow this unique system. While I can follow this easily it is a bit hard for other people to reproduce the same results, as I selected 10 stocks which I thought had potential. There is a lot more than 10 stocks in the magazine.

Why not pick up a magazine you had from a while ago and try it out ... it might just turn out to be an interesting and profitable experiment.

Good Luck Investing.

Dogs of the ASX 200 2005 review

There is a well known method known as the dogs of the dow. The theory is that the stocks which performed the worst this year will have the chance of improving the best the next year.

Some research was done in the last year to see how this performed on the ASX for 2005. It took the ten stocks which had the highest dividend yields and compared them to the market return.

Of the 10 stocks :

• 9 out of the 10 showed a positive gain ( the lowest gain was 11.4% )


• 5 out of 10 stocks outperformed the market after dividends were included


• 4 out of 10 stocks had a higher capital gain than the market

I believe last year wasn't the best year for testing this theory as it is a theory that holds its position in negative years. Interestingly the gain of the market was 25.5% (after including dividends ) and the return of the ten stocks was 24.78%. Slightly under performing the market. If we take out the losing stock the average gain was 28.7% which is a nice gain on the market average.

I will be interested to follow this for the next year and see how it performs ...

Good Luck Investing.

Price Earnings Value of ASX 200

I came along a set of interesting numbers which I have put into a graph below. These numbers reflect the ASX 200 (which comprises of the top 200 shares on the ASX) price to earnings for the past 5 years.

Looking at the graph you can see that this is in a steady downtrend.

This would suggest to those viewing it that the current bull market run of 3 years is not overextended. If you were viewing this data without knowing how the market has performed you would probably assume the market has dropped or remained steady.

So why has the avg P/E ratio dropped ?

My speculation is the resource boom has caused dramatic increases in some of our major companies such as Woodside Petroleum Ltd (ASX:WPL), BHP Billiton Ltd (ASX:BHP), and Rio Tinto Limited (ASX:RIO). Along with this banks such as National Australia Bank (ASX:NAB), Commonwealth bank (ASX:CBA), Westpac Banking (ASX:WBC) and ANZ Banking (ASX:ANZ) have continued to increase the profits to record levels. The stock market rising has also boost the fees chargeable for financial firms such as AMP Limited (ASX:AMP) and Etrade (ASX:ETR). This flows through to other sectors which support these companies such as IRESS Technologies (ASX:IRE).

Another reason could be that there are a record number of Listed Property Trusts (LPTs) in the ASX 200. This companies historically have lower Price to Earnings ratios and higher dividend yields.

Is the Market Overheated ?

To determine if the market is overheated I started to look at the sector breakdown and found some interesting statistics. Of the ten sectors that make up the index, 70% (7 out of 10) were showing Price to Earning ratios of 20 or more. The average is 16.5 so a ratio of 20 shows that sector is around 20% overpriced. The only three sectors not overpriced were financials, Materials and Telecommunications.

I wrote this article to show that all statistics on the market are not equal. If I broke this down further I would be able to specifically pick out stocks which are over priced in each sector. I would also be able to highlight which companies in each sector are currently showing value and could be a potential takeover target or are set for a turnaround.

So to answer the question on whether the market is overheated : YES !!!!

70 % of the market is running at historically high price to earnings and there is only two ways for this to remedy itself. The first is the prices retract to the historical mean which is around 15-16 for the ASX 200 or companies produce dramatic earnings increases in the future to justify the high price to earnings of today.

Good Luck Investing.

Berkshire Hathaway Inc Letters - Warren Bufett

Everyone in the world who has ventured into investing has heard of the extraordinary investments made by Warren Buffett. He is regard as the top investor of our time and it is amazing how different his philosophies are from the majority of the fund managers out there.

The best place you can read up on Warren Buffetts style is through his letters to the Berkshire Hathaway inc shareholders. The letters he has written from 1977 through to 2005 are available on the companies website. You should definitely have a read if you want to see a master at work.


The best way to emulate a master investor is to know as much about him as possible. Here is a timeline of Warren Buffetts life so far and a short biography is available here.

Even the wikipedia has a section dedicated to Warren Buffett.


I learnt a lot from reading the letters and reading about Warren Buffetts life and I can not overstate the importance of researching his management style if you want to be a successful fundamental long term investor. He is by far the most influential person (along with Graham) for today's fundamental investor schools. He has a lot of person qualities that you should try to emulate when dealing with the market if you also want to be successful.



Good Luck Investing.

Value Investing ( Using Fundamental Analysis)

Definition

Value investing claims that the market sometimes undervalues a stock's true worthbaesd on the financial information which is available to the market.

The theory revolves around the fact that the market is slow to react to news or a changing market condition, but in time it will eventually assign a value that accurately prices a security. It may even be that the market has overreacted to some news pushing the share to an undervalued price.

A value investor looks for a stock that is trading at or below what it really is worth.

The two schools of Thought

There are two distinct ways that a value investor determines if a stock is trading at a bargain price:

1 .One way is to compare the stock (or industry) with other stocks (industries).

Usually the markets run in cycles. If everyone is currently buying resource stocks, perhaps they are selling bank stocks. Bank stocks might be sold off more than what they should have, which could result in giving the savvy investor an opportunity to find a good value in a stock (within a sector) that is currently unloved.

2. The other way a value investor might spot value is to know something about the company that they don't feel is factored into the price.

For example a company might be coming out with a new "Miracle Product." ( For example the I-Pod for Apple.) or assets on the balance sheet may be undervalued. This occured in Bunnings Wharehouse Property Trust (ASX:BWP) a few years ago in regard to the value of buildings.

The biggest criticism of value investing is that it often times doesn't provide instant gratification. this is why most people turn to trading instead of fundamental analysis. Many investors want to see their stock double within weeks of buying it. Value investors often have to wait for a lot longer than that but not always. What is gratifying to a value investor is that their investment usually get triple digit returns.

Good Luck investing.

Principles of Share Trading as aligned with Fundamental Analysis

The author of ASXNewbie has been posting an article by Charlie Wright on the Principles of share trading.

It has been posted in a three part series. Here are the links to Part1, Part2 and Part3.

I have taken a few comments from the article as they apply to investing with fundamental analysis as well as technical analysis.

Sound money management and risk control are the keys to being a profitable trader. I will say over and over again, it is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure

This is true of fundamental analysis as well. You need a sound technique for picking quality companies and then you need to apply good cash management and risk minimisation to make the best possible opportunity for a profit.

Have a Healthy Time Horizon.One of the biggest problems new traders have is that they think they will make a large amount of money right away. They think they will get rich quick. This type of reasoning is very similar to the short-term thinking in American business in general, usually managing for the current quarter’s profits, focusing on short-term earnings at the expense of long-term investment and profit growth.

With fundamental analysis we are not in this for the short term 2%-4% profit. We are looking for the shares that are going to increase by 20%-100%. We are looking for quality companies that are undervalued by the market so that when they revert to the mean we can make a significant profit.

Give your trading strategy enough time to work.We tend to be impatient, and we sometimes think that we should get instant gratification. This will not work in trading. The only way you will really know whether you are a successful trader
is to be successful over time. A week or a month will not be enough time to tell you how you are doing. You should be trading with the objective of making money in the long run, consistently, and with the confidence that your strategy will make money given enough time.

Fundamental analysis usually focuses on stocks which are out of favour and are undervalued. It may take time for the market to agree with your perception of the company. It usually will rely on an earnings upgrade or an important announcement before people start to take notice of the company. The only reason to get out of a trade is if you feel the company no longer has the qualities of a good company based on your previous assumptions.

Use historical statistics.I don’t think anyone has ever traded without first looking at historical statistics. Even some traders who deny they are strategy traders have used historical data....Before I would trade it, I absolutely insisted on knowing what the strategy’s personality was and how much money it would have made. Using historical statistics gives you great peace mind, particularly in learning to love losing trades. Knowing the history of a trading strategy can give you tremendous psychological comfort during those tough periods of losing trades and draw down. Historical statistics tell you how much money the strategy has lost in the past, how many losing trades it has had in a row, and the largest losing trade the strategy has experienced. This is very important information if you are learning to accept losing trades. Comparing historical data with the current string of losses and draw down can give you much comfort that what you are experiencing now is not unusual and has happened before. Maybe not in exactly the same manner, but it has happened before.

There are many books which have investigated the use of fundamental analysis techniques over a long time frame ( 25 years +). In all cases it has found the low Price to Earnings, Low Price to Cash flow, Low Price to Earnings Growth and Low Price to Book Ratios have been successful techniques for making above market returns. Knowing this allows us to follow these techniques which the knowledge that we should make a profit longer term.

I have met many successful people, and the one thing that they have in common is that they love what they do. Many have told me they can’t believe that they actually get paid for doing what they do. They have so much fun they feel guilty taking money for doing it. Many successful people will tell you that they would do what they do even if they weren’t paid at all.Successful people don’t work for the money. Work hard and love what you are doing and the money will follow. Successful people work first and count the money later. Sometimes they don’t ever count it, and some don’t even know (or care) how much they have. They just know that they have enough to allow them to continue what they are doing; working hard and having fun. Love trading for its own sake.

This is very true for myself and I believe is a reason why I am successful at selecting shares. I spend hours reading through annual reports and analysing the industry, comparing companies and researching competitors that I get a good feel for the shares that I own. I love feeling that I have put in some hard work and come out with a great result. Even when the market does not agree with my analysis I am eager to await the pending announcements so that my analysis can be confirmed or rebuffed. It is the love of the work that makes you a successful investor.

In the final analysis, any market is just a collection of individuals making decisions and placing money in the market based on these decisions. Most of these individuals are doing what comes naturally to humans, buying low and selling high. Statistics show that 95% of these people lose money. To be a successful trader, you have to do the opposite of what this 95% is doing.

I believe that 95% of people in the market are trading. Only a few select people are taking the time to analyse companies and buy profitable long term gold mines. It is the extra analysis that occurs that is not being done by the 95% of people in the market. Even the managed funds have extremely high turnover these days. Remember commissions hurt and a long term position has a lot less commissions then entering, exiting, reentering, re-exiting .... etc strategy. Losing 2% a year in commissions can cost as much as 22% of your portfolio after 10 years. This is a significant amount.

While this article was aimed at traders I feel anyone who is in the market can gain some insightful knowledge on how to use money management and risk control for investing. It will be very worthwhile that you go and read the entire series so that you can improve your own investing.

Good Luck Investing.