The S&P/ASX 200 index is on track for its largest monthly gain ever. As of Friday, it was up 8.3 per cent in the month of October. The All Ordinaries index, up a similar amount, is headed for its best monthly gain since March 1988. Over in the U.S, the S&P 500 is up 13.5 per cent in October its best month since 1974.
Theoretically, these are wonderful times to be a sharemarket investor. Such wonderful gains in such a short period of time.
There are just 2 slight problems…
1) In early October, instead of taking advantage of the bargains on offer, many investors were selling in a fit of panic.
2) Year to date, even after this massive rally, the S&P/ASX 200 index is still down 8.6 per cent.
At least the Aussie dollar is up…up to $US1.07, making a mockery of our guess that it'll be trading closer to $US0.90 in the next year or so. Still, at least it makes for cheap overseas holidays, if you can get a flight out of Australia.
The Qantas Airways Limited (ASX:QAN) very public dispute is making all the headlines. Without taking sides, our own Foolish feature writer Scott Phillips hit the nail on the head when he said…
"The problem for airlines is that the service has effectively become commoditised. A flight to Los Angeles, Bangkok or London takes the same amount of time, is just as uncomfortable, and has similar food and entertainment options regardless of which airline you fly with."
We asked Scott whether Qantas shares were a buy today.
"I don't know how far Qantas shares would have to fall before I bought some… I can't think of a price that would be low enough. Regional Express Holdings Limited (ASX:REX) though has an interesting niche – there'd be a right price for Rex."
Shares in the company known as REX are already up 7.7 per cent since Scott suggested investors might want to take a look at them. They are still worth a look today as a play on the seemingly ongoing and seemingly unstoppable mining boom.
The unstoppable mining boom
According to Fairfax, a report by Deloitte Access Investment Monitor details a record 935 investment projects planned or under way, each worth $20 million or more.
The total value exceeds $894 billion, an increase of 7.5 per cent in the past three months and 16 per cent over the past year.
Leading the way are what Access calls "an unprecedented number of mega projects" – 14 worth more than $10 billion and five of those worth more than $30 billion. Mining accounts for about one-third of the $406.8 billion of projects under way and almost all of the $487.3 billion in projects planned.
All that adds up to a lot of fly-in/ fly-out mining charters, with REX potentially being one of many major beneficiaries. This is no slam-dunk opportunity, but one we're keeping an eye on.
Beware this value trap
When it comes to the mining boom, we're somewhat cautious about 'stronger for longer' commodity prices. Call us boring-old east coast city slickers, but with all the supply set to come on stream in the years ahead, we can't help but think commodity prices are heading for a fall.
Iron ore is already down around 30 per cent in the past month. No wonder Fool contributor Peter Phan asked whether Fortescue Metals Group (ASX: FMG) was a value trap.
Who knows, Fortescue may be a big winner in the years ahead. Their shares are up 25 per cent since their early October lows. Heck, even Qantas could be a long-term winner too. As of writing, the shares in the flying kangaroo are up over 5 per cent today alone. Joyce 1, Unions 0, so far…
We wish both companies well. But we'll be avoiding them with a barge pole.
Just say no
Many investors struggle to say no. Fearful of missing the next big thing, they buy shares in all sorts of companies, from the highly speculative miners to companies like OneSteel Limited (ASX: OST). When asked about OneSteel, our Investment Analyst Dean Morel recently said "if a company's return on capital is less than its cost of capital then run away…fast." OneSteel gets the barge pole treatment from us too.
There are around 2,000 companies quoted on the ASX. Opportunities abound. Why invest in a company like Qantas, with all its risks, when there are hundreds of other companies to choose from?
It's exactly that type of discipline that Dean brings to The Motley Fool. He runs a relatively concentrated portfolio. When he invests his cold hard cash in a company, you can be sure he's left no stone unturned. Not every individual investment will be a winner, but that's why we diversify and why we have portfolios. A success-rate of above 60 per cent is considered outstanding.
Profiting from the picks and shovels
Speaking of the mining boom, Dean's focusing on companies he thinks stand to prosper whatever happens to commodity prices. In the trade, such companies are called 'pick and shovel' plays. And with over $600 billion worth of mining projects under way and in the pipeline, there are sure to be plenty of mining-service company winners out there.
You'd think such companies would be very popular with investors. But seemingly not, or at least not in the shape of one $400 million company providing construction services to the resource and oil and gas sector Dean has his eye on. It has a price to earnings ratio of just 10, and analysts are forecasting revenue growth in the region of 25 per cent in 2012.
Whilst the big brokers focus on the likes of Qantas, we see far better, and far greater opportunities in shares that are off the beaten path. It's exactly these types of companies that Dean will be focusing on for the forthcoming launch of our subscription stock picking service. We'll keep you posted. Timing-wise, we're shooting for the latter part of November.
3 picks for the Melbourne Cup
And now for something completely different – The Melbourne Cup.
There is a big difference between investing and gambling. A bet on the Melbourne Cup is a complete gamble. As long as you realise that, realise there's a strong likelihood you'll lose 100 per cent of your money, and only gamble with money you can afford to lose, a little First Tuesday flutter should do no harm.
With all that in mind, we asked our punting mate Lewis for his thoughts on the big race. Lewis has been a full-time 'sport's investor' for 5 years, so knows a thing or two about these things. Over to Lewis…
"The internationalisation of Australia's biggest horse race is well and truly complete. Eleven of this years participants are trained in the Northern Hemisphere, a further seven were bred and raced north of the equator but are now owned and trained locally, leaving a paltry six truly Australasian representatives. The end result, a fascinating renewal and without question, the strongest, and deepest Cup field ever assembled.
Genuine cases can be made for as many as 18 of the runners competing on Tuesday – don't be afraid to follow your own instinct/judgement as there are no 'good things', despite what those on the street corner may espouse. In saying that, it would be decidedly un-Australian not to try and narrow our focus.
The French raider Dunaden ($8 Betfair) could not have been more impressive in the Geelong Cup – a key Melbourne Cup lead-up in recent times. He still looked big in condition in the parade that day, can only have derived improvement, and is weighted to win.
The Lloyd Williams owned and pseudo-trained Mourayan ($18) turned in a fantastic Cup trial in the Mackinnon on Saturday. Williams' obsession with the Cup knows no limits, as he bids for his 4th, and this tough on-pacer will look the winner at some point on Tuesday.
Finally, former US galloper Unusual Suspect ($48) has impressed in two of his Australian runs-to-date, turning in an excellent Cup trial last time out in the Caulfield Cup. His trainer, Mick Kent, is arguably the best local trainer of stayers behind the Cups' King, Bart Cummings, and at current prices, Unusual Suspect represents excellent value at juicy odds."
Happy gambling.
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Neither Bruce or Dean have an interest in any of the companies mentioned above, but Bruce does have a small interest in each of the three Melbourne Cup horses mentioned above. The Motley Fool's disclosure policy gallops.
