The stock market is stuck between 5,000 and 5,500 points looking for a reason to break out on either side of this trading range. Many investors may rightly question why our market remains a long way off its all-time high of 6,873 points when many other markets around the world are reaching new all time highs.
All we can do as investors is use the information we have available to make informed decisions as to which stocks to buy, hold or sell. Below are my personal recommendations. [Please note: As always, the opinions expressed on Fool.com.au are the writers' own and do not necessarily represent the opinion of Motley Fool Australia.]
Buy: Atlas Iron (ASX: AGO)
This is a favourite stock and sector of mine and one that I remain bullish on. Iron ore spot prices recently jumped to U.S. $116.90 a tonne. This price movement takes it back to the levels it was sitting at prior to the March 'flash crash'.
Atlas is my pick in the sector because it trails the performance of its rivals and to date I believe this is unjustified. Atlas has continued to meet and exceed guidance, has a debt-to-equity ratio of under 20% and is generating strong cash flows that can be used to pay off the remaining debt, grow the production capacity of the business or return funds to shareholders.
Trading at a price-to-earnings ratio of less than 9 and a price-to-book ratio of only just above 0.5, I think this stock appears a screaming buy. I expect the stock to trade back to $1.30 a share in the near to medium term and over $1.50 per share in the longer term depending on stability of the iron ore spot price.
Hold: QBE (ASX:QBE)
The great Warren Buffett loves insurance companies; he sees them as a huge pool of cash. I generally agree, but unfortunately for QBE shareholders the management team — once seen as a key strength of the business — has repeatedly disappointed the market. However it is looking increasingly likely that the new management team has taken a highly conservative view and swept out all the bad news in recent times.
Insurance margins have been consistently falling and the low interest rates in America have been to blame for the poor returns made on cash held by QBE in recent years. However this previous market darling could be on the road to recovery, and if so, the share price could quickly recover lost ground.
If the next reporting period indicates an improvement in insurance margins and financial performance, I will be carefully reconsidering my view on QBE.
Sell: Coca-Cola Amatil (ASX: CCL)
Many are viewing the recent price weakness in Coca-Cola Amatil's share price as a buying opportunity. I don't share this view. Coca-Cola Amatil has an exclusive license to the famous Coke syrup, which should almost be a license to print money. However the business has been reporting poor financial results and the guidance provided is not overly encouraging.
My main concern with Coca-Cola Amatil is that it is carrying significant debt. With a debt-to-equity ratio above 150%, it is one of the more highly debt-leveraged businesses operating on the ASX. Further, a pet peeve of mine is companies returning dividends to shareholders when they have significant debt balances. In my opinion, it is in the shareholders' interest to protect the long term viability of the business by maintaining a healthy balance sheet prior to the payment of dividends.
Cocal-Cola Amatil has a clear path to growth, which includes taking a larger market share of the alcoholic beverages market by utilising its extensive distribution network. Another growth option is the expanding presence in the wider Asia Pacific region. Until Coca-Cola Amatil cleans up the balance sheet and provides evidence it is able to best utilise its valuable assets, I feel it's a sell.
Foolish takeaway
The key ingredient when picking winning stocks is to stay away from dangerously high debt and buy into stocks that have a clear path to growth. Don't be fooled by dividend yields or strong brand names; look at the financial health of a business before parting with your hard-earned cash.
