Stock takes: Tuesday buyers get a bargain

More than three times the volume of Warehouse shares were traded on Tuesday (the day before the Foodstuffs stand) than was traded on an average daily basis over the preceding month or so. A coincidence?

It's outrageous, says a shareholder who took the time to contact Stock Takes. He thinks some insider trading had to be going on. Calls to the Securities Commission and NZX yielded no meaningful response - although those guys never say whether they are investigating a share-price movement until they make a market announcement.

Some believe a degree of insider trading is par for the course in this country. Even if the obvious insiders don't trade, it's impossible to stop someone saying a quiet word to friends and relatives.

In some cases there may be truth in that but the market was already awash with gossip last week - the theory being that Stephen Tindall was nearly ready to sell.

The stock got a mention in this column last week for that reason. By Tuesday the buzz had intensified and might have been enough to generate some of the buying action. For the record, Tindall has denied he's reviewing his stake but few in the market believe him. As one broker said on Wednesday: "The Warehouse is now in play."


Sector of death?

In the wake of Provincial Finance's collapse, it is disturbing to see the company was one of the better rated on the investor advice website www.interest.co.nz.

Provincial had an "ABA" rating on the SQP system - which ranks local finance companies on their relative strengths. That means it was among the top 20 per cent for balance-sheet strength and profitability and in the top 50 per cent for balance-sheet quality. On that basis, it seems likely there must be others out there that will struggle to make it through this downturn in the economic cycle.


or platter of opportunities?

Of course, whenever a sector is out of favour bargains are waiting to be had, says Ian Waddell of Wellington broker WJM. Dominion Finance is one of those he is tipping as significantly undervalued.

Based on WJM's forecast (earnings per share of 20.6c), it is trading on a PE multiple of just 6.3. It's a good bet that is well short of the value that say ... an Australian private equity buyer would expect to pay.

Waddell has a 12-month share price target of $2.12 on the stock which closed at $1.30 yesterday.

Provincial actually had a sizeable stake in Dominion Finance, which is understood to have been snapped up quickly by canny South Islander Alan Hubbard and South Canterbury Finance. Hubbard clearly hasn't lost faith in the sector and could well play a key role in an overdue consolidation.


Don't stop till you get enough

Who is buying Rakon? The tech stock just keeps soaring. It closed at $3.12 last night and has piled on another 35c in the past week, taking its gain since listing on May 15 to more than 95 per cent.

One view is that the stock is simply coming into line with the kind of value that similarly positioned tech stocks would have in the US. That's fine, except it seems that it is local retail investors who are still among the biggest buyers. Smaller Kiwi investors can't necessarily afford the same risk profile as their US counterparts and one hopes the buying is being done based on an understanding of Rakon's business plans, not on hype that it is a "hot stock" that can be sold for a quick profit.

Fisher Funds is one of the institutions that has been an active buyer of Rakon. Fund manager Carmel Fisher said she wasn't buying on Wednesday when the stock leapt 29c and past the $3 mark. But she certainly isn't selling and says she isn't surprised that there are still plenty of people prepared to get in at these prices.

Almost no one got the amount of stock they wanted on listing and, because there isn't much scrip around anyway, it is difficult to buy without the price levitating. That means there are still plenty of Rakon believers chipping away so that they can boost their stake.

Fisher points out that she is there for the long term, which no doubt means she is prepared to ride out a few ups and downs. If things do go right for Rakon, $3 could be a low price to have paid. But as the price rises, the pressure will go on management to start delivering the good news.


Masters of metal

Listed heavy metaller Steel & Tube Holdings has been upgraded to "neutral" by First NZ Capital, which has also revised its 12-month target price from $3.95 to $4.40. That still makes the stock slightly overvalued on yesterday's close of $4.45 - but less so than it was.

Steel & Tube's earnings are caught in a tug of war between improved global steel prices and soft domestic demand, says First NZ's Jason Familton.

Unfortunately, it is the domestic weakness side of the equation that continues to dominate the outlook. Demand is softening as residential building activity slows and infrastructure spending - like the extra Government money for roads - isn't particularly beneficial to Steel & Tube, Familton notes.

Some relief may be on the way as manufacturers begin to benefit from the lower dollar. But it is likely to be another six months before that flows through.

The other positive is that the global steel price has improved significantly in the past two months. As a local distributor, Steel & Tube benefits. Steel & Tube will also benefit from the strength of its management team, balance sheet and dividend yield.


Liven up the board

Vodka-maker 42 Below has found a Hollywood hot shot to sit on its board. Plus SMS has added nobility (the Earl of Cowley).

It kind of makes Telecom's choice of Wayne Boyd for chairman seem a little boring - couldn't they find an astronaut or cowboy or something.


That's far enough

The Credit Suisse analysts have called time on Tower's stellar market run, yesterday choosing to downgrade the stock from "outperform" to "neutral".

The insurance and financial services company has had an incredible rise this year, driven by a strong performance in Australia, where the whole sector is in boom mode thanks to compulsory superannuation.

In its half-year result last month, it topped profit expectations and signalled that it might start paying dividends again soon.

Its shares have more than doubled this year and hit a high of $3.52 on Wednesday. They closed down 9c at $3.43 yesterday.


Low-flying earnings

Last week, Air New Zealand effectively buried an earnings downgrade in its monthly operating statistics - by giving a "thumbs up" to lower forecasts made by some market analysts.

In a move that seems a bit cynical - or maybe just plain lazy - Air New Zealand says it is no longer going to provide this kind of earnings guidance because all the relevant data (such as fuel prices) is publicly available.

Jeez ... it's hard enough to keep track of the price of car fuel these days, let alone jet fuel.

Air New Zealand will get away with it because the stock is 82 per cent owned by the Government and thinly traded.

Peter Sigley, of Goldman Sachs JB Were, doesn't pass judgment on the decision but he does note it at the top of his latest report.

He concludes that a downgrade based on rising fuel costs was hardly a surprise and cuts his 2006 forecast by 18 per cent to $96.8 million and his target valuation by 7 per cent to $1.91.

The ongoing bad news is the kind of thing that gets one thinking about counter-cyclical opportunities and "deep-value buying", Sigley says. There are some positives on the horizon such as a resurgent tourism sector and a possible code-share arrangement with Qantas. But, sadly, it doesn't bear up to closer examination, he says.

Risks such as fuel costs and competition mean there is no need for investors to hurry into the stock.

Deep value will start to emerge if the stock falls below about $1.15, he says. It closed at $1.20 yesterday.


Shag(pile)adelic news

One company happy to publicly state the obvious this week was Feltex.

The fall in the value of the dollar has provided an earnings boost for the carpet-maker. No, it didn't take a rocket scientist to see that might be a positive but there was a collective sigh of relief that Feltex's news wasn't bad.

The company is still recovering from last year when it missed profit forecasts twice. Analysts were yesterday only mildly impressed by numbers that were in line or perhaps slightly better than expected. But investors interpreted it as a sign the company wasn't going to go belly-up in the near future and decided to wade in on the basis that the shares were undervalued.

Given that they hit an all-time low of 32c just last week, that now seems like a reasonable assumption. The shares were steady at 38c yesterday.