Start The New Financial Year With A Bang

It has been a tough month and a tough 12 months for stock market investors, with the All Ordinaries Index off 15.5% for the year and 10.3% for the month of June.

Yet there is hope…plenty of hope. Oil, gold and other commodity prices continue to trade near record highs, all boding well for our specially selected resource stocks.

Below we review the UPS and DOWNS of the last 12 months and highlight just 2 of the many small resource stocks we are recommending as a BUY today.

Happy New Financial Year Fellow Stock Market Investor,

We start this week with a thought...

On Monday morning this week the Australian stock market opened nearly 50 points higher.

That was despite a fall on Wall Street on Friday of over 100 points. It was also despite widespread predictions of a fall for the Aussie market – for example, a headline on the front page of the Australian Financial Review (AFR) said “Markets on edge as bears roam Wall St”.

True to form, by the end of the day, the All Ordinaries Index had fallen 17 points. But that early morning rise got us thinking…

As has become the norm over the past 6 odd months, resources stocks were higher, not surprising when you consider many commodities are trading at or near record highs.

We find it rather interesting that the market rose in early morning trade, despite all the doom and gloom and generally negative sentiment.

Stock markets are always looking forward, not back.

They are not looking at the oil price of over $US140 a barrel today, instead they are looking at what they might think the oil price is in 3, 6 and 12 month’s time.

They are not looking at interest rates today; they are looking at interest rates in the future.

The Aussie economy is slowing. It will slow further in the months ahead as higher interest rates and higher petrol prices continue to put the bite on working families. That’s why the share prices of many industrial, banking and retailing stocks are trading at or near 52 week lows.

The shares of many companies in those same sectors look cheap today, but if you look forward a few months, look to a slowing economy and the prospect of static to falling house prices, they don’t look so cheap.

Is The Worst Of The Stock Market Almost Over?

On Monday morning, the market looked forward. It looked at…

• High commodity prices today and in the future.

• High oil prices today and in the future.

Could it also have looked forward at…

• The near bottom of the US stock market?

• The cheapness of some selected industrial, banking and retailing stocks?

• The fact that the stock market bottoms before the economy bottoms, and perhaps, just perhaps, the market can see the bottom of the US economy?

• A soft landing for the Aussie economy, where interest rates start nudging down, house prices flatten instead of falling, unemployment levels stay roughly steady, and the resources boom carries on in a steady state for the foreseeable future?

As usual with economic predictions, there are no right or wrong answers. We’re not saying this is the bottom of the market for industrial, banking and retail stocks. We’re not saying this is the bottom for the US stock market. We’re not saying Aussie interest rates won’t go even higher.

How You Can Profit From This Racing Certainty

But one thing is absolutely for certain…

Stocks are significantly cheaper today than they were a year ago, and cheaper than when they hit their peak in November last year.

We don’t know about you, but we like to buy things on the cheap. And when things are cheap, we like to buy more of them.

It never ceases to amaze us that people who were happy to buy stocks when they were trading at their all time highs just a few months ago are now completely put off the stock market.

A few months ago we mentioned the story of one of our friends who sent us an email saying…

“I don’t think I will EVER buy any more stocks. I invested $3000 and they are now worth just over a grand, what a joke. I am hoping they will climb up to around $1,500 and I am going to sell then, losing 50%, and get out for life.”

Inexperienced investors are often sucked into buying when prices are high, afraid of missing out on future profits. Conversely, they sell when the share price is at a low point, just wanting to get out, to avoid any further pain.

Stock market investing is a great way to build long-term wealth. To give up on it because of one or two bad experiences is a mistake. Instead, a better course of action would be to learn from your mistakes, change strategy, and vow to conquer the stock market.

We Tell You The Exact Stocks To Buy, And When To Buy Them

We tell our Members exactly which stocks to buy, and when, and which stocks to sell, and when. Our stock recommendations and our research and advice is completely independent.

We do not offer any brokerage services, we do not offer any investment banking services and we are not paid by any of the companies that we recommend.

We are long-term investors. We are patient. We minimise risks. We don’t panic. Our stock recommendations reflect those qualities.

There are three main pillars to our success story…

1. We have a passion and an absolute dedication to making you money.

2. We are totally committed to searching for and picking the stocks with the very best chance of rising in value in the weeks, months and years ahead.

3. We will offer you an outstanding level of service.

We firmly believe great stockmarket wealth is accumulated over a long period of time.

The Ups and Downs of 2007/8

We wish farewell and good riddance to tax year 2007/8. It has been a year of ups and downs…

The UPS

• Australian interest rates have risen four times over the past 12 months, and now stand at a mortgage-stressful 7.25%.

• Rents are up, and supply of rental properties remains tight.

• Oil is up 175% since early 2007 and on Friday hit yet another all time record high of US$143 a barrel.

• A rising oil price means higher petrol prices – $1.60 a litre, and rising.

• Gold breached the US$1000 an ounce mark back in March, and today still trades at around US$930 an ounce, up over 40% in the last 12 months.

• The Aussie dollar continues to ride high, trading at around US$0.96 cents, a 25 year high, with many commentators predicting parity in the coming months.

• Global steel prices, iron ore, coking coal, thermal coal and copper, amongst others, all trade at or near their record highs.

• Many resource stocks are significantly higher than the levels they were at 12 months ago. For example, Woodside Petroleum is up around 47%, BHP Billiton is up 26%, Rio Tinto is up 38%, Origin Energy is up 62% and Newcrest Mining is up 48%, just to name a few.

• Some smaller resource stocks have soared over the past 12 months, like these selected companies…

Cockatoo Coal +302%

A Small Oil & Coal Company +215%

Integra Mining +203%

Carnarvon Petroleum +121%

(Total returns from 1st July 2007 to 30th June 2008. Source: Bloomberg)

For more on the small oil and coal company whose share price has gone up 215% in the past 12 months, read on. As you’ll see, not content with the gains to date, even at today’s price we recommend the shares as a BUY.

It’s just one of the ways we think we can help start your new financial year with a bang.

The DOWNS

• The All Ordinaries Index has fallen 15.5% over the past 12 months.

• The same index is down a whopping 22% from its record all time high of November last year.

• Highly indebted companies like Allco Finance, ABC Learning and Centro Properties, amongst others, have seen their shares absolutely hammered.

• Banks and retailers were hit hard as higher interest rates and petrol prices slowed the economy. National Australia Bank are down around 35% in the last 12 months, Westpac is down 20%, Commonwealth Bank is down 27%, ANZ is down 35%, Harvey Norman is down 42% and David Jones is down 48%.

• Uranium, zinc and nickel are all some way off the levels they traded at 12 months ago.

• Some smaller companies stocks have fallen heavily over the past 12 months, including some of our portfolio stocks. We’re the first to admit we’re not perfect, and we do get some of our recommendations wrong, like OceanaGold down 78%, Marathon Resources also down 78% and Biota Holdings down 59%.

We’d love to be able to say to you that the 2008/9 tax year is going to be an UP year for the stock market.

But we can’t say that.

We do have a sneaking feeling it may be an up year, mainly because we expect resource stocks to continue their merry way, but also because we suspect a strong buying opportunity for banks and selected industrials and retailers may be just around the corner.

Our Members will be the first to know when we recommend selected bank, industrials and retail as a BUY.

Our One Guarantee – There Will Be HUGE Winners In 2008/9

We can guarantee one thing however…amongst the literally hundreds of smaller resource stocks, there will be some HUGE winners in 2008/9. That’s the easy part. Knowing which stocks today will be the huge winners of tomorrow is obviously the hard part.

Although we follow larger companies, often recommending them as a BUY when we think the time is right, the area in which we really specialise is in smaller companies, and particularly smaller resource companies.

As we alluded to above, we don’t get every recommendation right. But the good news is that to be a successful investor, you don’t have to get every selection right.

The very best investors, investment bankers, traders, hedge fund managers, portfolio managers and the like aim for a 60% strike rate of winners versus losers.

Our 3 Keys To Investment Success

A 60% strike rate doesn’t sound super exciting. But at that level, most investors should be able to generate above average returns.

The key thing to understand is that share prices can go up thousands of percentage points, but can ‘only’ go down 100%.

We’re generally looking for 3 things from our model share portfolios…

1. Smaller companies with the potential to double, triple, quadruple and more over periods lasting from several months to several years.

2. Larger companies with good share price downside protection whilst offering above average returns in the months and years ahead.

3. More winners than losers.

We think we’ve been doing a pretty good job with our share recommendations. But ultimately our Members are the ones that really count, the ones who make the only judgement that counts to us.

These Stocks Have More Than Quadrupled In Under 3 Years

Above we mentioned our preference for smaller companies, and that we are generally looking for companies with the potential to double, triple, quadruple and more in value over periods lasting from several months to several years.

Take these companies we initially recommended to our Members when they were small companies, each worth less than $30 million at the time of recommendation…

Carnarvon Petroleum – Up an amazing 881% since February 2006!

Platinum Australia – Up an astonishing 711% since November 2005!

Terramin Australia – Up a breathtaking 667% since December 2005!

(Share prices taken on Monday 30th June 2008. Gains don’t include dividends.)

An Incredible Buying Opportunity

A couple of months ago, Wilson Asset Management principal Geoff Wilson was quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.

“I am more excited about the next 12 months than I have been in the last two or three years.”

Fast forward to today, and on Monday this week Wilson Asset Management portfolio manager Matthew Kidman was quoted in the AFR as saying…

“Over a period, this will look like an incredible buying opportunity, but sentiment is just awfully negative. With bear markets, it just takes a while (for things to improve)”.

We couldn’t agree more. Whilst we are cautious on the short-term outlook for the stock market, on a long-term perspective, we are seeing some excellent value in some of our specially selected smaller resource companies.

The Small Oil & Coal Company Whose Best Days Could Be Still Ahead

Take the small oil and coal company we highlighted above, the one whose share price has already soared 215% in the last 12 months alone.

Not content with that gain, just last week we re-recommended the company as a BUY to our Members.

We initially recommended our Members BUY the company at 5.9 cents way back in December 2005. At the time of our recommendation, the whole company was only worth around $10 million.

In March this year, the share price was a disappointing 4.4 cents. As you may recall, it was about that time that the stock market was in a state of fear and panic. Margin calls were rife, panic selling abounded and smaller companies, particularly smaller resource companies, saw their share prices particularly hammered.

We concluded our March 2008 report on the company with…“Although the current share price performance does not demonstrate it, we believe that exciting times lie ahead for shareholders and that 2008 should be a positive year.”

Little did we know, but just 2 months later, the company announced a “company transforming” acquisition in a deal worth $235 million. As can be seen from the chart below, the stock market clearly liked the acquisition too, with the share price rocketing to over 30 cents.

Today the shares have slipped back a little to around 21 cents, but that is still a gain of 366% since our report in March 2008 and a gain of 247% since our initial BUY recommendation in December 2005.

But we don’t think the gains are going to be finished just yet, as judged by our BUY re-recommendation at around 20 cents of just last week.


There are two other key facets of our investing strategy…

1. There can be substantial profitable investing opportunities for long-term Members. For people who bought this company way back in December 2005 but didn’t follow our regular updates about the company in the months and years that followed, we think it might be likely they’d have sold out in frustration and/or boredom, perhaps even booking a loss, but definitely missing out on the huge profits long-time Members may now be sitting on.

Not having a long-term perspective and not following our recommendations over a number of years could prove to be a very expensive mistake.

2. We are patient, long-term investors. Although the share price performance of this company was disappointing for long periods of time, we didn’t lose faith in the company and in particular, their management.

In a stock market rife with short-termism and the desire for quick profits, we like to think we stand out as different – and we think the example of this company and our long-term investing record show that difference in action.

Your Huge Investing Advantage

Because the company was so small, it didn’t get onto the radar of the big investment houses.

That’s where the smaller private investor has a huge advantage, because lurking around in the small company universe are many hidden stock market gems that just won’t get noticed by larger investors.

As we said previously, the three big winners we mentioned above – Carnarvon Petroleum, Platinum Australia and Terramin Australia – were all initially recommended to Members when they were each worth less than $30 million.

After their tremendous share price performances, each is worth significantly more, and only now are institutional investors getting interested in these companies. In the meantime, Members who bought in at our initial recommendation prices should already be sitting on significant profits, with potentially more to come.

The Small Gold Miner We’ve Just Re-Recommended As A Buy

Then there’s the small gold producer/explorer we recently recommended as a BUY to our Members.

• We first began following the company’s progress more than two years ago. We’ve been greatly impressed by their ability to deliver on their exploration and development goals.

• The final piece in the jigsaw puzzle is now in place, as the company has just produced its first gold bar. The commissioning of their initial Brazilian gold mine, well below budget, is a major feat considering the current environment of delays and cost blow-outs right across the resources sector.

• This is NOT a speculative resource play. We firmly see the company as a long-term generator of wealth for shareholders. The company is run by what we consider to be one of the resource sector’s most highly regarded boards and management teams, which have a goal of building a high quality and growing mid-cap gold producer.

• We believe the rewards for shareholders will be in the form of sustainable capital growth and dividends driven by long-term production and exploration success, rather than many of its peers with a short-term focus on chasing whatever commodity might currently be ‘hot’ to generate short-term share price appreciation.

• We have every confidence in the company’s eventual ability to reach its annualised production target of 35,000 ounces. With the gold price at around A$960 and their anticipated production costs of around $A450 an ounce, we’re very confident the company will generate robust cash flows, and we think that should ultimately be reflected in a sharply increased share price.

• We concluded our recent report by saying we think the recent share price weakness provides an astute buying opportunity, even for existing holders. Accordingly, we recommend the company as a BUY to all Members around 60 cents.

The good news is the shares still trade at around the 60 cent mark they were at when we recently recommended them as a BUY.

After the market’s “horror” June, we believe the share prices of some of our specially selected small resource companies are looking decidedly cheap.

We wish you happy and profitable long-term investing.

P.S. The Aussie stock market has just endured its worst June performance in 68 years and its worst financial year in more than 25 years. Yet Glenn Mumford said in the AFR this week “…investors should avoid assuming the worst…it’s not difficult to construct a positive trajectory for US equities.” And most people agree what’s good for US shares is good for Australian shares.

P.P.S. The oil price is high and remains high. As a reminder, we believe triple-digit oil prices are here to stay, and that oil could easily trade as high as US$200 per barrel. On the downside, it means high petrol prices are here to stay. But on the upside, we think we’ve found a unique collection of smaller oil companies that are set to benefit hugely from the high and rising oil price in the months and years ahead. We believe, once again, the June stock market sell-off is offering new Members some compelling investment opportunities right now.