Budget shock: Labor takes from the rich to give to the poor. Liberal voters unhappy. Working families rejoice. Stock market doesn’t care. Read our poem.
The oil price continues to surge higher, with more than one respected source suggesting it might be headed towards US$200 a barrel. If that happens, the stock prices of some of the companies mentioned below could soon be heading into the stratosphere.
There is a downside however – predictions are that it will soon cost almost $100 to fill your car with petrol. We have a hot tip to help you deal with the problem.
Dear Fellow Stock Market Investor,
Everyone else is doing a Budget Special this week, and we’re no exception. As you’ll see below, the only difference is that ours is a little more brief and to the point.
Whilst the budget is big news, as far as stock market investing is concerned, we think it will have little or no impact. In fact, in a rare moment of creativity, we’ve come up with a little rhyme to mark the first Labor budget for 12 years. We hope you like it…
Governments come and go,
Budgets are full of woe,
Policies ebb and flow,
But the stock market should not slow.
We have more on the budget below, but first, back to stock market news.
The oil price continues to hit all-time highs, crossing US$126 a barrel in
Petrol prices are set to rise even further. With the national average already at a lofty $1.46 a litre, Commsec equities economist Savanth Sebastian has said petrol prices could soon hit $1.65 a litre.
At that level it would cost $99 to fill an average car with a 60 litre fuel tank.
If you think that’s bad, Mr Sebastian also warned it was only the beginning of an upward march.
Welcome to the brave new world of scarce oil and therefore permanently higher petrol prices.
Scary as it is – almost $100 to fill up the car – our theory is that if you can’t beat them, join them. Buy shares in oil companies.
A little further down we highlight 5 of our very favourite small oil producers/explorers. But first, a word on oil.
Why The World Must Discover More Oil
The facts are relatively simple…
· World demand for oil is high and only going to get higher still in the years and decades ahead. For example, the IEA (International Energy Agency) forecast that
· Most of the world’s cheap oil has already been discovered.
· Oil exploration companies increasingly have to drill for oil in more and more difficult places. This adds to the cost of exploration and in the event of a discovery, the cost of extraction. Either the price of oil stays high and goes even higher, so that it makes these new discoveries economical for the oil companies, or the oil stays in the ground. Given the increasing demand and the world’s complete reliance on the naturally depleting natural resource called oil, it has to come out of the ground.
To ram home the point, the huge “Tupi” oil field offshore
Oil Could Jump To US$200 A Barrel
It’s a little hard to remember now amidst all the oil price excitement, but back in early 2007, when we forecast oil would reach US$100 a barrel, oil was around US$60 a barrel. At the same time, mainstream opinion was for a return to prices below US$50 a barrel.
How things can change. Fast forward a little more than a year and we’ve now got major investment bank Goldman Sachs warning people to expect US$150 to US$200 a barrel oil prices over the next 10 years. And that’s all despite oil having already increased twelvefold in price over the past decade.
As reported this week in The Australian Financial Review (AFR), the president of OPEC Chakib Khelil recently said in
Putting this all together, we retain our view on the long term appreciation of oil due to shortening supply and growing demand. In the near term however, there is a risk that prices have moved too far too fast. As such, we consider a period of consolidation and perhaps even a correction in the oil price is likely.
The Stock Market Is Finally Waking Up To These Cheap Oil Companies
In our view, triple-digit oil prices are here to stay. And based on the recent price movements of some of our favourite small to medium sized oil companies, it appears like the market is finally waking up to this new dawn…
April 2008 Low Price Today Change
Small
Mid sized Thai producer/explorer $0.46 $0.755 UP 64%
Mid sized WA explorer/producer $1.54 $2.00 UP 30%
(All prices taken from Yahoo Finance as at Monday 12th May 2008 close)
Just this week, the small
The mid-sized WA explorer/producer mentioned above is in the middle of a $60 million drilling programme in 2008 pursuing a portfolio of moderate risk, high impact opportunities.
As part of that programme, this month the results of a potentially “game changer” exploration well are due to be released to the market. The company says the drilling result has the potential to see the company’s oil and gas reserves increase by a massive 250%.
If they do strike gas in a big way, we’d imagine the shares could take off. The high impact exploration well is drilling as we speak, with results due at the end of May.
The Harsh Reality Of Investing In Small Resource Stocks
Yet not all small and medium oil production and exploration companies have joined in the fun…yet.
When it comes to recommending shares for our many Members to BUY with their own hard-earned cash, as you can imagine, we are very discerning.
In short, we know what we’re doing. We are often seen on Bloomberg, CNBC, Sky News and ABC television giving expert advice on the stock market. We are regularly quoted in the Australian Financial Review and other national newspapers. When the financial media want an independent opinion, they talk to us.
The harsh reality is that there are literally hundreds of small mining and resources stocks quoted on the Australian Stock Exchange which will never ever make a profit. We’re not interested in these “penny dreadful” stocks complete with dubious management and highly speculative exploration acreage.
With that in mind, when we recommend our Members BUY a stock, you can be sure we’ve done our homework. As well as feeling comfortable about management’s credentials, integrity and past successes, we often meet and speak to them. On occasions we’ve even been out to places like
Of course, nothing is guaranteed in the world of stock market investing. Although we’d love it if every stock we recommended to our Members went up, in reality that is simply impossible. Instead, we concentrate on recommending stocks where the odds of success are stacked in our favour, be that the company has a compelling valuation and/or is sitting on highly prospective acreage.
You Might Be Able To Pick Up This Oil Explorer On The Cheap
As we mentioned above, not all of our specially selected small and medium oil production and exploration companies have joined in the recent share price fun.
Take the mid-sized oil exploration company we’ve previously highlighted here about whom we recently said “…is sure to generate exploration excitement.”
The potential oil resource in place in the area they are drilling is estimated to lie somewhere between 6 million and 40 million barrels, with mean oil resources estimated at 20 million barrels.
We first recommended this exciting oil explorer as a BUY in January last year when the shares were $1.64. We re-recommended them as a BUY in January this year at around the same price, despite the company making excellent progress over the intervening 12 months.
Fast forward to today, and largely courtesy of the sub-prime fall out, the shares currently trade around the $1.05 mark. That is 36% down on the price we were happy to recommend them as a BUY just a few months ago. It just might turn out to be an excellent opportunity for new investors to buy shares in this company on the cheap.
With $48 million in cash and receivables, all in all, we think this company adds up to an excellent medium-high risk/high reward oil explorer.
The Great Budget Winners & Losers
By the time you read this, Wayne Swan’s first budget will have been dissected to death. We’re happy to leave the midnight candle burning to the political experts.
Instead, as promised, here’s our very brief summary of the winners and losers…
The Budget Winners
Ordinary working families.
The Budget Losers
Wealthier people.
It’s classic Labor – take from the rich to give to the poor. The only shock is that after more than a decade of Liberal government, we could be all forgiven for forgetting what a Labor party budget looks like. Now we know again.
We’re politically agnostic. Sure some sectors and some companies benefit more under a Labor government compared to a Liberal government, but we’re not in the game of second guessing politicians in order to generate stock market returns for our thousands of Members. There are far better ways of doing that, commonly known as the “keep it simple” strategy to stock market investing.
Politics is not called politics for nothing. The first post-election budget of any government is not about winning votes. Liberal voters aren’t going to suddenly turn into Labor voters after this budget, and that’s absolutely fine with Kevin Rudd. You can’t take away something you never had in the first place.
Anyway, post-budget, life will go on largely as usual for the vast majority of the Australian population. Working families will still struggle to pay their mortgage. Wealthier people will carry on buying luxury cars and plasma TVs, even if they are slightly worse off from this budget.
Forget The New Mercedes – Watch The Stock Market Instead
In fact, we’d argue that wealthier people are far more likely to be affected by the machinations of the stock market than by paying a little bit more for their next Lexus or Mercedes.
The Australian stock market has recently gone through a period of almost unprecedented growth. As a reminder, take a look at the returns of the All Ordinaries Index over the past 5 years…
· 2007 – UP 14%
· 2006 – UP 20%
· 2005 – UP 16%
· 2004 – UP 23%
· 2003 – UP 11%
Courtesy of the stock market, many people have seen their wealth increase substantially. Their superannuation funds will also have benefited greatly. Up until late last year, the feel good factor for stock market investors would rarely have felt better.
As feel good factors tend to do, all this prosperity created a culture of complacency and comfort. Many people thought the stock market would continue to generate double digit percentage gains year in year out. As a result, the future value of their super funds looked very rosy. Some even contemplated early retirement.
How Margin Loans Ruined The Feel Good Factor
The booming stock market also created a culture of greed. Rich people, ordinary people and highly paid company directors borrowed money in order to further juice their stock market returns. Against the backdrop of this constantly rising stock market, these margin loans were seen by many as being a no-brainer.
You could borrow money at 8%, buy a basket of high-yielding blue chip stocks, use the dividends to pay the loan interest, and sit back and enjoy the strong capital gains. Feeling good…
But as we’ve seen in the first few months of 2008, the stock market can fall as well as rise. High yielding blue chip shares can fall further than you could ever have thought. Take a look at just how far the shares of these popular companies have fallen from their 2007 peak to today…
2007 Peak Today Change
A.B.C. Learning $8.45 $1.28 DOWN 85%
Allco Finance $13.24 $0.56 DOWN 96%
Centro Properties Group $10.06 $0.385 DOWN 96%
(All prices taken from Yahoo Finance as at Monday 12th May 2008 close)
It all goes to serve some very valuable investing lessons. The three companies above were all heavily indebted. Excessive debt, especially when used to pay top dollar for acquisitions, can be evil.
We successfully avoided the three companies mentioned above. In fact, we’ve been recommending our Members avoid the banking and finance sector for some time now. Notwithstanding the excitement to banking shares caused by this week’s Westpac bid for St George, we’ve been vindicated in our decision.
Instead, we’ve steadfastly stuck to our proprietary stock picking formula which has served us rather well in the 7+ years of our existence, and have stuck to our outstandingly positive view on resources and resource stocks.
Although we like to think our past track record of BUY recommendations is very impressive, here’s a story about one booming resource stock we missed…
The Story Of The Fortescue Billionaire
There was a fascinating story in the AFR last week about how the decidedly low profile Kie Chie Wong of southern
They say money makes money, but $1.2 billion is an absolutely enormous amount of money. It is so much money that it is virtually impossible to comprehend.
$1 million is a lot of money.
$5 million would mean you not having any money worries for the rest of your life.
$10 million is about the level you might start thinking about fast cars and fast boats.
$25 million might make you think about properties in exclusive addresses in
By $50 million you’d probably look towards philanthropy and the odd Rembrandt and Picasso for the sitting room.
At $100 million you’d seriously be struggling to know what to do with all your money – or so we imagine. (If anyone reading this out there is worth over $100 million, please reply to this email telling us what you do with all your money.)
And He Still Drives A Honda Car…
Stating the obvious, Mr Wong’s $1.2 billion is 12 times more than $100 million. If he lost $200 million, he’d still be worth $1 billion. It truly is impossible to comprehend for mortals such as ourselves, and to be fair, is probably difficult for Mr Wong to comprehend himself – according to the AFR article, he drives a Honda car and lives in a “pleasant but unspectacular brick home.”
How did Mr Wong do it? In 2003, a private family company amassed a stake in Fortescue at split adjust prices of between 1 cent and 3 cents a share. Today the shares trade at around $9.30 and the whole company is worth over a stagging $23 billion.
Andrew Forrest, the founder and major shareholder of Fortescue, is today
To us, the most impressive thing about Mr Wong’s new found uber-wealth is that he has held his Fortescue shares all the way through to now. We don’t know about you, but we’d be feeling a little nervous having such a large proportion of our wealth tied up in the fortunes of just one company, and one that has yet to turn a dollar of revenue.
It puts to shame most people’s version of and portfolio diversification. Mr Wong’s hugely successful investment in Fortescue is well deserved. Sure, there was a bit of luck involved – in 2003 the mining boom was something associated with the Poseidon bubble way back in 1970. Today Fortescue’s iron ore resource is in high demand from
Three Important Investing Lessons
To ordinary stock market investors such as ourselves, the story of Mr Wong’s rise to the billionaire’s ranks teaches us 3 important investing lessons…
1. When you have a high conviction share idea, you should buy a meaningful amount of shares in that company.
2. Run your winners. Many people make the mistake of cutting their winners and running their losers. If you’ve found a great and growing company whose future prospects are not reflected in its share price, regardless of the price you initially paid for the shares, why would you want to sell it?
3. If you have a high tolerance for risk and can sleep well at night, having a concentrated portfolio can be good for your wealth.
Our Best Ever BUY Recommendation Continues To Fly Higher
Our goal here is to create wealth for our thousands of Members. We try to do that by recommending our Members BUY high quality companies when they are trading at compelling valuations.
Like Warren Buffett, our favourite holding period is forever. We like to run our winners and cut our losers. When we like a company, we are not afraid of re-recommending it as a BUY at prices much higher than our original recommendation.
For example, take the small oil company we featured last week that is already our best ever recommendation.
We first recommended the stock as a BUY to our Members back in February 2006. At the time, the share price was a lowly 5.4 cents and the total company was worth just $17 million.
For those of you not lucky enough to have bought at 5.4 cents, or at other share prices significantly below the 55 cents the shares traded at 3 weeks ago, you might be thinking you’ve missed the boat.
But rather than thinking investors have missed the boat, we think the best days for this company could still be ahead of it. In fact, so confident were we in this company’s future prospects, we recently upgraded the stock to a BUY.
Fast forward to today, and on Monday this week, the shares closed up another 6% on the day, and now trade at 75.5 cents. That’s an impressive 37% jump in just the last 3 weeks alone.
But far more impressive is the massive almost 1300% gain any Members who bought at 5.4 cents would now be sitting on.
If they’d followed our investing philosophy of running their winners, and like Mr Wong, weren’t afraid of having a large amount of money invested in one company…
How You Could Have Turned $20,000 Into Almost $280,000
An investment of $20,000 made in February 2006 at a share price of 5.4 cents would now be worth a quite unbelievable $279,629.63.
Now not every share we recommend to our Members will perform as well as this small oil company. Some will fall in value – after all, we’re only human, and mistakes can and will happen.
But, we hope it gives you an idea of what’s possible by investing in the stockmarket, and by following our investing philosophy.
With the share prices of some of our specially selected small resource companies running hot, we urge you to act now in order to access our current recommended stocks.
We wish you happy and profitable long-term investing.
P.S. Perpetual portfolio manager James Bruce was quoted just last week in the AFR as saying…“Right now, I think this is the best stock picker’s market in resources that we’ve seen for quite some time.” We couldn’t agree more, and we’re quietly confident our specially selected portfolio of small resources stocks could be soon set to rocket.
P.P.S. Are you worried the resources boom is about to end? We aren’t. Although there is a tremendous amount of investment being thrown at the commodity supply side, it will take a long time for output to rise. The demand we have seen coming from
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