Stocks For a Downturn

[TjamesX]

here's you cue Investor

In another thread I posted;

I need to find some companies that have demand 'locked in' get revenue from non discretionary spending and do well in a downturn... any ideas?

and I thought it would be a good idea for to get some lists of companies that have these characteristics and operate in industries that have these characteristics.

So if anyone has any ideas provide a companies that;

- have the characteristics mentioned above
- why is their industry has limited exposure to a downturn
- have provided a track record of performing
- have the management to carry them through tough times

I'm not really looking for new Co's that 'might' be making a profit in the future even if their industry has the right characteristics.

Jeez I'm asking for a lot!

cheers
TJ

 

[Investor]

Okay, I will respond.

I am a long term investor who has achieved financial freedom (able to live from the dividends from sound companies) from stockmarket investments. Tertiary education (graduate and post graduate) and work experience made it possible for me to gain the skills. Had the benefit of training in a major bank, to do unsecured corporate lending. This type of lending focuses the mind. Not allowed to lose too much money and face the sack. How much more focus can one need? Managed to survive.

I view investment in shares as the purchase of a part of the business (which is stating the obvious). In return for my capital, I will receive dividends and whatever capital gain or loss should I decide to sell. Hence, it is important for me to know at some depth, the business that I am investing in, to form an opinion as to the likelihood of a successful investment.

I analyse industry risk (what are the prospects for the industry or industries - if a conglomerate) in which the company operates. Business risk - what are the business risks that are peculiar to this business and are they being properly managed and mitigated? Management risks - what are the management risks - is management competent and have demonstrated a good track record? Financial risks - analyse liquidity risks, gearing risks, profitability risks and creative accounting risks (meaning the quality of reported EPS might not be sound - this type of analysis requires skill).

To demonstrate the power of a buy and hold strategy:

1. In today's Financial Review, on page 28, USD10,000 invested in Berkshire Hathaway (Warren Buffett's company) in 1964 is now worth USD30 million. A few Australians hold shares in this company. Unfortunately, I am not one of them.

2. Woolworths (WOW) at $3 in the 90's is now worth $15.29. During the past five financial years, WOW has returned 25% p.a. (jncluding dividends). This is a low risk investment (people will spend in supermarkets and the liquor retail divisions irregardless of economic conditions - they might spend a little less than in good times, but they will continue eating and drinking). Also, economic conditions do not bother the 1/3 of households who are debt free.

3. CBA at IPO $5.40 in 1992 is now worth $36.34. Might have peaked though.

4. Sonic Healthcare (a leader in pathology and radiology) was once available at $0.07 cents. Wish I had bought at that time, instead of later. It is now worth $11.80. This is an expensive P/E share.

5. AGL (energy) was below $10 a few years ago. It is now $14.36, despite returning special dividends a few months ago and a capital return of $500 per 1,000 shares paid yesterday. People will use gas and electricity irregardless of economic conditions.

6. Sigma Pharmaceuticals was around $3 a few years ago. Now it is $8.12.

7. Ramsay Healthcare was $3.41 when I bought around 2 years ago. Now $7.90.

8. Coca Cola was $5 around 2 years ago when I bought for the first time. Now $8.28. Many people are addicted to this drink. Even Warren Buffett.

9. BIL (Brambles) was oversold to $4 around 2 years ago when I bought for the first time. Now $7.85.

10. Invocare (IVC) was listed in 2004. It is the only listed funeral business in Australia, with around 30% market share. This business is as certain as certain can get. Talk about non discretionary! My investment has almost doubled in less than a year. A bit expensive now.

11. Origin energy. Bought some time ago. Almost doubled in value. Again, people will use energy because they must.

So far, I have managed to avoid holding any shares in all the companies that have totally collapsed. Hope to continue doing so. Another collapsed yesterday.

Warning: This post is not investment advice. I do not have a licence to give advice. Do not read this post as investment advice.

 

[RichKid]

Great post Investor!
All I can add is along the lines of essential services: I find the better managed Gas companies with a good track record for dividends should do well. Might be some consolidation soon in the industry as it's not economical to have too many players spread allover the place. Of course I base my decisions primarily on TA but do look at fundamentals (as best as I can). Oil fundamentals suggest that well managed oil companies will increase profits too, but again there some that look a bit toppish.

Agree with your comments about IVC being overpriced, death rate does vary so that is a market risk. SHL appears to have some unappreciated upside potential in the UK market but too volatile for me atm.

You've done very well in resources (my pet sector) by buying in while most people didn't know what was happening. From what you say that was due to skill rather than luck. It's a rare thing to see a bull market as it is starting, most people jump in late.

 

[krisbarry]

People will use gas and electricity irregardless of economic conditions.

LOL....not in South Australia, electricity prices have rocketed up in recent years, due to lack of power stations. Summer tarrifs have risen as high as 50%. Power disconnection rates have risen dramatically and elderly people have been dying in the heat as they have been too scared to use fans/aircons due to the cost. It only takes one hot day in SA to trip the inter-connector between SA and Vic, and 3/4 of SA blacks out.

 

[Investor]

....not in South Australia, electricity prices have rocketed up in recent years, due to lack of power stations. Summer tarrifs have risen as high as 50%. Power disconnection rates have risen dramatically and elderly people have been dying in the heat as they have been too scared to use fans/aircons due to the cost. ...

This is sad news. Pity the people that died. I did read the news in the papers during summer. Was in Adelaide two summers ago (holiday in Glenelg) and it was very hot. The wind from the desert is really something.

I have also read that in the Northern Hemisphere, some people have died from heat in summer and from freezing in winter due to inability to afford energy costs. Across the world, energy costs are rising. BHP mentioned this a few months ago. This problem is expected to get worse because many governments have neglected new infrastructure.

Many years ago, when governments started privatising power stations, I did read newspaper reports that eventually tariffs would rise and supply problems would emerge because private companies merely focus on maximising profits. It was arguable whether electricity being an essential service, should be privatised.

In South Australia, from memory, a chunk of the power supply is now owned by the Hong Kong billionaire, Li Ka Shing and some by Singapore Power (?)

If global warming proves accurate, the problems will only get worse. Meanwhile, the power companies might continue to make profits by further raising tariffs. Some day, the public might blame the governments. Perhaps this should start now.

 

[TjamesX]

Relevant article relating to this thread;

Here

TJ

 

[Investor]

There is one aspect of that article that I do not agree with.

I expect media stocks to fall.

IMO, a lot of advertising expenditure is a waste of money, unless they aim to inform consumers about things that are not well known.

For example, it is a waste of space for banks to advertise in a generic sense unless they have a new product or special offer.

Why? Because people already know the banks and can only choose from the limited oligopoly. Also, there is the inconvenience/costs of changing banks.

Going forward, the new product called the Personal Digital Recorder (PDR) that has just been introduced to the market, has the ability to eliminate all advertisements on TV for the viewer who finds commercials irritating and a waste of time (people like me).

This product has the media industry seriously worried.

TV viewers might decide not to watch any more junk advertisements when the PDR becomes a common household item (probably in another 3 years).

All readers who hold media stock, please review your position and make up your mind.

 

[TjamesX]

Re media stocks - I would have to agree. Especially considering current times. I remember many months ago reading an interview with Buffet and he was pretty bearish about the business model going forward for a lot of media companies. He thought the big change was the internet and how it could provide consumers with a better service and at a lower cost.

I also remember talking to a friend who works for a newspaper - If I remember right, I think it was 60% or more of revenues come from classifieds.

If anyone has looked for a house to buy/sell/rent or a job lately.... and haven't typed in;

realestate.com.au or
seek.com.au

then you are really missing out on a better service - this is hitting at the heart of revenues for newspapers!

Re seek - Packer has done it again

TJ

 

[Smurf1976]

LOL....not in South Australia, electricity prices have rocketed up in recent years, due to lack of power stations. Summer tarrifs have risen as high as 50%. Power disconnection rates have risen dramatically and elderly people have been dying in the heat as they have been too scared to use fans/aircons due to the cost. It only takes one hot day in SA to trip the inter-connector between SA and Vic, and 3/4 of SA blacks out.

The technical and marginal cost characteristics of the generating plants installed in SA are such that they do not effectively compete against each other. This is a function of natural resource availability and plant type and can not readily be overcome. Unfortunately this is beyond the comprehension of those responsible for "competition" policy, electricity industry industry reform and the like who won't understand even after reading this.

I must add that the inefficient manner in which power plants are operated these days also adds an awful lot of totally unnecessary greenhouse gas emissions to the atmosphere. Then we pay even more to develop renewable energy to offset those emissions.

Those who believe reform has been a success conveniently ignore the large technology and interest rate-driven cost reductions when hyping the benefits. By the way, the big power consumers don't like this market approach either (simply too expensive) so householders have some unusual company on this issue.

But you could make $$$ investing in the right energy companies.

 

[Smurf1976]

LOL....not in South Australia, electricity prices have rocketed up in recent years, due to lack of power stations. Summer tarrifs have risen as high as 50%. Power disconnection rates have risen dramatically and elderly people have been dying in the heat as they have been too scared to use fans/aircons due to the cost. It only takes one hot day in SA to trip the inter-connector between SA and Vic, and 3/4 of SA blacks out.

The technical and marginal cost characteristics of the generating plants installed in SA are such that they do not effectively compete against each other. This is a function of natural resource availability and plant type and can not readily be overcome. Unfortunately this is beyond the comprehension of those responsible for "competition" policy, electricity industry industry reform and the like who won't understand even after reading this.

I must add that the inefficient manner in which power plants are operated these days also adds an awful lot of totally unnecessary greenhouse gas emissions to the atmosphere. Then we pay even more to develop renewable energy to offset those emissions.

Those who believe reform has been a success conveniently ignore the large technology and interest rate-driven cost reductions when hyping the benefits. By the way, the big power consumers don't like this market approach either (simply too expensive) so householders have some unusual company on this issue.

But you could make $$$ investing in the right energy companies. The distributors and transmission companies certainly wont go broke since they are effectively guaranteed survival by government. Retail and generation are more risky.

 

[Investor]

In the latest aireview no. 58 (just released) on page 19:

"You would probably have guessed it yourself, but once the market starts correcting, defensive stocks become an investor’s best bet.

UBS’s quantitative analysts have analysed twelve previous market corrections and on their assessment defensive shares perform on average 4% better than the broader market in the three months following a market peak.

The current correction is number thirteen and its peak was reached on March 21. Because no two corrections are the same, even if several key elements are similar, UBS notes the current correction seems to be developing at a quicker pace as, on historical figures, the broker’s Defensives Index
is currently well in advance of its typical response and 5% ahead of the market after only six weeks since its peak.

The specialists leave the obvious question unanswered –does this mean that defensives’ attractiveness will be shorter this time?- but zoom in on which
stocks provide investors with the maximum safety instead.

According to UBS, the answer is selected stocks with low beta, high earnings certainty, high earnings momentum and high price momentum" (see tables in aireview no. 58).

In that table, were the following stocks:

1. AGL
2. IVC (Invocare)
3. WOW
4. ENE
5. RHC
6. CML
7. ADZ
8. SIG (Sigma)
9. ALN
10. SHL (Sonic).

 

[Investor]

Warren Buffett speaks:

May 24 (Bloomberg) -- Billionaire Warren Buffett's utility company agreed to buy PacifiCorp from Scottish Power Plc for $5.1 billion in cash, gaining low-cost generators in the western U.S.

``PacifiCorp is a business that may not fit the profile of Scottish Power, but it fits our profile,'' Buffett said today on a conference call with reporters. ``Our favorite holding is one that is forever. Utility assets fit the bill.''

The purchase is the biggest by Buffett since his Berkshire Hathaway Inc. bought General Re Corp. in 1998. Buffett on April 30 said he's looking for ways to invest Berkshire's $44 billion in cash. The Berkshire utility company, MidAmerican Energy Holdings Co., already owns the Kern River pipeline, which carries natural gas to California.

The acquisition of hydroelectric and coal generation that can be sold in California shows that Buffett wants ``to be long supplies of energy in a state that looks to be short,'' said Nathan Judge, a utility analyst at Atlantic Equities in London. ``PacifiCorp is one of the lowest-cost producers of electricity in the country.''

Berkshire owns 83.4 percent of MidAmerican and has 9.9 percent of the voting control. The structure, set up when a Berkshire-led group bought MidAmerican in 2000, was a way to comply with the Public Utility Holding Company Act, a Depression- era law that limits ownership of utilities by non-utility companies.

Berkshire has stakes in such businesses as Gillette Co., the world's largest razor maker, and Procter & Gamble Co.

Debt Assumption

MidAmerican, based in Des Moines, Iowa, will assume $4.3 billion in debt, bringing the value of its purchase of Portland, Oregon-based PacifiCorp to about $9.4 billion. The company will gain 1.6 million power customers in six western U.S. states, about doubling its existing power and gas utility business.

The acquisition will increase MidAmerican's power-generating capacity by 78 percent to 16,000 megawatts, enough electricity for 12.8 million average U.S. homes. Most of that output will come from coal-fueled plants, which produce power at less than half the cost of gas-fueled generation.

Glasgow-based Scottish Power Plc, whose 1999 purchase of PacifiCorp for $12.2 billion marked the first acquisition of a U.S. utility by a foreign company, said it will record costs of 927 million pounds ($1.7 billion) because the unit was valued at more on its books than Buffett is paying.

Classic Buffett

``I think it's kind of a classic case of Buffett expanding in an area he understands,'' said Donald Yacktman, who oversees $1.1 billion at Yacktman Asset Management in Buffalo Grove, Illinois. ``He's paying less than the Scottish company paid.''

PacifiCorp is building two power stations in Utah, where rising population is boosting power demand by 4 percent a year. The company, which contributes almost half of Scottish Power's profit, has customers in Oregon, Washington, Utah, Idaho, Wyoming and California.

``If we run it well we can deploy significant amounts of capital in the long term and earn a reasonable rate of return,'' MidAmerican Chief Executive David Sokol said in a telephone interview.

MidAmerican plans to invest $1 billion a year over the next several years to expand and upgrade PacifiCorp's operations, Sokol said.

Buffett's Edge

``In Sokol you have one of the best operators of power companies,'' said James Armstrong, who helps manage about $450 million, including shares of Berkshire, at Henry H. Armstrong Associates in Pittsburgh. ``Then you have a parent, Berkshire, that is one of the last AAA-rated companies on earth that can supply virtually any amount of capital.''

Class A shares of Berkshire, based in Omaha, Nebraska, rose 2.4 percent to $85,500 in New York Stock Exchange composite trading. Scottish Power shares climbed 6.3 percent to 469.75 pence in London after the company said it plans to return $4.5 billion from the PacifiCorp sale to shareholders.

Scottish Power, the U.K.'s fifth-biggest energy provider, hasn't decided whether to return the money to investors in a share buyback or a special dividend, Chief Executive Ian Russell, 52, said in an interview. The sale may take a year to complete, he said.

Scottish Power's stock has dropped 33 percent since the company announced its purchase of PacifiCorp in December 1998. Shares of Scottish & Southern Energy Plc, the U.K.'s fourth- largest energy supplier, rose 30 percent in the same period.

Failed Investment

``PacifiCorp has not been a successful acquisition, both operationally and financially,'' James Sparrow, an analyst with Royal Bank of Scotland, said in a note to investors.

The PacifiCorp deal comes amid a wave of U.S. utility acquisitions. Duke Energy Corp. on May 9 said it agreed to buy Cinergy Corp. for about $9 billion. Exelon Corp. agreed in December to buy Public Service Enterprise Group Inc. for $12.8 billion, the largest U.S. utility acquisition on record.

The Public Utility Holding Company Act, which limits Berkshire's voting control of MidAmerican, also may complicate the purchase of PacifiCorp. The law requires utility companies to operate in a single region.

While definition of a region for purposes of the law has been subject to debate, a combined MidAmerican and PacifiCorp would probably fail the test, said Scott Hempling, a lawyer in Silver Spring, Maryland, who represents state utility commissioners. ``I can't imagine they have lawyers telling them this will pass.''

Regulatory Hurdle

This month, an administrative law judge at the U.S. Securities and Exchange Commission said American Electric Power Co.'s 2000 acquisition of Dallas-based Central South West Corp. failed to meet some requirements of the law. Repeal of the act was included in energy legislation the House approved April 22. The Senate energy committee is considering repeal.

MidAmerican may be betting on repeal of the holding company act, according to Christine Tezak, utility analyst with Stanford Washington Research Group. ``Otherwise, the plan to acquire Scottish Power's PacifiCorp would be very hard pressed to clear'' the single-region test and other requirements, Tezak said in a note to clients.

MidAmerican's Sokol said the acquisition meets the single- region test because the companies get fuel for their power plants from the same places. Both use coal from Wyoming's Powder River Basin and natural gas from the Rocky Mountains, he said.

``I think we will not have a problem getting through those regulatory issues at all,'' said Sokol, who discussed the proposed merger with officials from the SEC and Federal Energy Regulatory Commission.

Buffett, 74, has become the world's second-richest man, according to Forbes magazine, by purchasing out-of-favor stocks and companies. About 20,000 shareholders and admirers attended Berkshire's annual meeting April 30 to hear Buffett and Vice Chairman Charles Munger talk about their investing philosophy.

UBS AG and Morgan Stanley advised Scottish Power on the PacifiCorp sale. MidAmerican worked with Houlihan Lokey Howard & Zukin, a Los Angeles-based investment bank.

 

[It's Snake Pliskin]

Buffett, 74, has become the world's second-richest man, according to Forbes magazine, by purchasing out-of-favor stocks and companies. About 20,000 shareholders and admirers attended Berkshire's annual meeting April 30 to hear Buffett and Vice Chairman Charles Munger talk about their investing philosophy.

Hi Investor,

This is from "How to think like Benjamin Graham and invest like Warren Buffett".Quote: "Buffett , for example, generated most of the billions of wealth Berkshire Hathaway has accumulated from about 10 investments over about 40 years. Many of those billions came from buying big stakes in large companies at times when their value was woefully underappreciated by the market." By Lawrence A. Cunningham.

Regards

 

[Fleeta]

Stocks for downturn - LIC's are pretty defensive.

I bought into WLS today for 90c. Its NTA after tax is $1.02. Its not often you get to buy a good quality LIC for 12% discount, I think the money is pretty safe.

Any thoughts on this move?