Aurizon, Asciano and Transurban still industrial sector favourites

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There are 32 stocks in the ASX 200’s industrials sector and that accounts for just over 6% of the index! Also, as can be seen from Table 1, there are no real ‘stand out’ stocks as judged by the latest consensus recommendations given in the final column of that table (1.0 is the highest possible rating, 4.0 is lowest). So, while an investor might be spoilt for choice – or confused by the similarity of many of the stocks – my longer-term picks of Asciano (AIO), Aurizon (AZJ) and Transurban (TCL) reported on this site 12 months ago have served me reasonably well.

Table 1: Data on companies in the ASX 200’s Industrials sector

Source: Thomson Reuters Datastream and Woodhall Investment Research – 24 January, 2014.

I did flirt with also considering Qantas (QAN) and Downer EDI (DOW) in my last review of this sector (six months ago). Thankfully, I ruled in that report that I would never own an airline (as I have always maintained since I first entered the market a long time ago). Downer only made 4.1% on the six months – just below the 5.7% achieved by the ASX 200 and 6.8% for the sector – but that is a lot better than many others!

Today’s line-up

The best current rating in Table 1 is a ‘2.0’ for Decmil (DCG). Since this company is in the mining services space, it would take a very brave investor to just dive in. Of course, Aurizon Holdings (AZJ) and Asciano (AIO) are also involved in rail and freight for Queensland coal, but they seem stable. I do not know enough about Decmil. True, its price has not been slaughtered, as so many others have in this sub-sector in recent times, but I do not have the stomach for it – at least at this point in time. If I bought in and it did really well at, say, a weight of 2% – 3% of my portfolio, it would have little impact on my wealth. On the other hand, if Decmil got smashed, it also wouldn’t have much impact on my wealth but I would feel stupid. My personal ‘stupidity index’ is one of my key measures for risk management because it might affect my ability to make future investment decisions.

Another way of thinking about this sector is as a yield play. The highest expected yields come from UGL (UGL), Sydney Airports (SYD) and Leighton Holdings (LEI) – all over 6% with limited franking credits or other tax breaks. The trouble with UGL and Leightons is that much of their increases in yield expectations come from recent, big stock price falls. The question is, will their dividends still be payable at current expected levels? Sydney Airports might be a better bet.

The gut index

But if I follow my gut, I still continue to prefer Aurizon, Asciano and Transurban Group (TCL) with maybe a dash of Sydney Airports for yield. There is just too much going on in this sector for a simple ‘quantitative pick’. From Table 2, I note that my capital-gains forecast for this sector is really good at 22% for the next 12 months. I am sorely tempted to rebalance my Industrials stocks to take advantage, but I am also planning a much greater rebalance as I approach my 65th birthday in June. For other (younger?) investors, I have the sector as cheap (at  2.2%) and, if I were cashed up, I would want a piece of the action with my favourites.

Table 2: ASX 200 sector statistics

Source: Thomson Reuters Datastream and Woodhall Investment Research – 24 January, 2014.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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