Here are the value stocks on my shopping list

Founder and Publisher of the Switzer Super Report
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This is the latest chart story of Bitcoin. Late last year it was selling for $US20,000, and I kept getting questions from listeners and viewers about whether it was worth buying. I said I didn’t know but my best guess was no!

I was right. Because I’ve learnt from the likes of Warren Buffett, I knew I didn’t understand bitcoin and how it got to that price, so I just couldn’t jump on board. I still don’t understand it. With seemingly new rivals for bitcoin being created at a rate of knots, I remain a short-term sceptic, even though I believe cryptocurrencies will have a role in the future. That said, it will come with regulation and that’s going to take some time to happen.

Good value

But I don’t really want to talk about bitcoin. Instead, I want to look at value stocks. Clearly, in early 2017, bitcoin looked like a value play for those who understood or believed in it. However, by early 2018, even the true believers were becoming doubters.

Recently, Charlie Aitken became a value stock supporter and, as someone who has been asking my expert guests on my TV show about value stocks, and when they’ll ride higher again (after growth stocks have dominated for nearly five years), it was satisfying to see my idea get some currency.

Before naming names, let’s be clear on what a value stock is. Investopedia says a value stock is a stock that tends to trade at a lower price relative to its fundamentals, such as dividends, earnings and sales, making them appealing to value investors. And I reckon these are the kinds of indicators that the professional analyst/broker would look at when making their calls on the target price for a stock.

Of course, these calculations rest on assumptions, which could be proved wrong. However, if you can’t cope with the uncertainty of stocks, then you better invest more in term deposits.

So what are the value plays?

The big four banks fit the bill, as they’re beaten up on the Royal Commission, and I reckon a worst-case scenario is factored in. The FNArena consensus target for CBA is $74.06. It ended Friday at $70, so that’s a 5.8% upside, which adds to a dividend of, let’s say, $4.30, giving a yield before franking of 6.1%. So if the experts who spend their life looking for value are right, then the biggest bank in the country could pay you back around 13% over the next year.

That sounds like value.

Even if the experts are wrong, a 7% plus dividend still looks like an OK gamble. And remember, the economy is growing faster than expected and banks have been raising interest rates, which usually helps their bottom lines. And some banks will receive the proceeds of selling off their unwanted side businesses.

What goes for the CBA goes for the other three big banks. I think all four banks are playable from here.

For another value stock, let’s stick with Charlie’s beloved Aristocrat Leisure (ALL). Here the experts’ target price is $34.84, against the latest price of $27.95. That implies a 24.7% upside. Even if they’re half right, that looks like value!

Two stocks for the brave are IOOF (IFL), which the experts think has a 32.8% upside. And then there’s AMP, which is earmarked for a 23.1% price rise but here you’re hoping that the brand damage can be offset by some huge innovations from its chairman, David Murray, and the new executive team.

These are two for the thrill-seekers, though it wouldn’t surprise me seeing these two businesses make a recovery over time, but they’ll need new business models and some damn great marketing!

Core values

I believe playing iShares Core S&P/ASX 200 ETF (IOZ) or SPDR S&P/ASX 200 ETF (STW) to get the eventual upside from the rise in the S&P/ASX 200 index over the next year, is a reasonable value play, as I think the Oz stock market is undervalued. The falling dollar will help a lot of stocks and if the US President eventually gets a deal done with the Chinese, our market could surge.

Given my SWTZ exchange traded product tends to track these ETFs, there’s a bit of wishful thinking in these two value picks, but it certainly appeals to logic as well.

We’re currently at 6185.5 and our all-time high from November 2007 was 6873.20. As history says, we pass the old all-time high before crashing, which implies a potential 11% gain, with a 4% plus dividend. All up, we’re talking about a potential 15% gain, holding the best 200 companies in the country.

What about some Asian value? Now this is one I’m treading with care and I have a watching brief on MCHI, which is the iShares China ETF that’s down 26% since this Trump trade war talk really got serious. Before that, all my very credible Asian-oriented fund managers argued that China and its top tech companies were a great 10-year bet. As Bernie Fraser once accurately predicted when he told us Australian Super was “the super of the future”, the likes of Tencent, Alibaba, Baidu are all companies of the future.

Clearly, Donald has trumped these stocks with his tariffs and trade war but the question is: has he created value for the longer-term investor? I think the answer is “yes” but I’m not prepared to press the buy button on MCHI yet. But after the US mid-term election, or if there is a sniff of a trade deal with China, I’d be happy to get set.

Of course, the China-Trump question might be as hard to answer as the question about bitcoin and whether it’s at a buy price right now, or not. However, in the final analysis, I’d rather invest in China’s top companies all leveraged to a smart phone possessed world, which becomes more addicted to the worldwide web by the minute.

And when I do buy, you, as our valued subscriber, will be the first to know.

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 regard to your circumstances.

 

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