Money
Issue No. 46 - April/May 2009
Focus on fundamentals
by Jacqui Colwell and Jacqui Colwell
After an eventful twelve months in equity markets, we have looked ahead to the themes we see as attractive in writing the Prescott 10 Best Investment Ideas for 2009. One key theme we consider likely to occur, with share markets falling broadly, will be a focus on the ‘top shelf’ companies; those that have strong operations and are able to weather economic uncertainty.
Share markets globally have been extremely volatile, mostly to the downside. The broad sell-off provides investors with an opportunity to look at companies that were perceived to be expensive. In this light it is worth considering the difference between price and value. Mainstream information published in the media usually focuses on sensational and timely issues; in the current market there is a focus on low share prices, high volatility, large reported losses and alike. The longerterm focus should however be on fundamentals of a company (earnings, financing, cash flow, dividends, etc.) to generate a valuation measure. This type of measure is more stable and not affected by market pricing vagaries, especially in larger companies.
Currently, we see company valuations remaining stable and in fact many continue to grow despite the bearish market conditions and slowing economy. Here we focus on two companies – Woodside Petroleum and Toll Holdings - we see them successfully navigating the current uncertainty, with share prices that we do not believe reflect the true value of the underlying businesses.
Woodside Petroleum is Australia’s largest oil and natural gas producer with operations in Australia, USA, Africa and the Middle East. The North West Shelf Joint Venture is operated by Woodside for their partners including BP, BHP, Shell and Chevron among others.
Ordinarily, resource stocks are not preferred; these companies have limited pricing control over their output, experience volatile earnings in line with fluctuating commodity prices and generally large initial costs ...
