This morning I received an email from Commsec and MyWealth, which are the stockbroking and wealth management subsidiaries of Commonwealth Bank of Australia (ASX: CBA). Contained within was a fascinating list of the 10 shares most commonly purchased in July 2015 by Commsec and/or MyWealth customers.
While a purchase of any one or two companies might be shrewd, the ten stocks taken together are not an attractive list in my opinion:
- BHP Billiton Limited (ASX: BHP)
- Australia & New Zealand Banking Group (ASX: ANZ)
- Commonwealth Bank of Australia (ASX: CBA)
- Fortescue Metals Group Ltd (ASX: FMG)
- Santos Ltd (ASX: STO)
- National Australia Bank Ltd. (ASX: NAB)
- Slater & Gordon Limited (ASX: SGH)
- Telstra Corporation Ltd (ASX: TLS)
- Westpac Banking Corporation (ASX: WBC)
- Rio Tinto Limited (ASX: RIO)
Four banks, three iron ore giants, a mining and oil corporation, an oil & gas business, a law firm, and a telecom business. There is a logical reason for the list – bigger companies are better known, attract more interest, and have more shares on issue than smaller companies. In this sense, they are more likely to be purchased more often.
However, this list also reflects the Australian fascination for buying big companies without much regard for their fundamentals. I'm not slamming the individual companies per se, because generally speaking they are well run and could be good opportunities.
Topped up on ANZ Bank because it pays a big dividend and exposure to Asian growth? Great idea. Bought Santos because you're convinced the oil price will rebound over time? Good for you.
That said, if you own all of the companies on the top ten list, it might be time to rethink your portfolio. Here's why:
Iron Ore – Rio Tinto, BHP Billiton and Fortescue
An industry characterised by oversupply and uncertain demand, which has resulted in sustained weak prices, with the potential for further falls. All three companies carry debt in US dollars, and the size of the debt can be expected to balloon as/if the Australian dollar weakens further against the US.
However, earnings will also rise as iron ore is sold in US dollars. All three face a balance sheet squeeze as cash flow dwindles, and Rio and BHP have promised strong dividends which they may have to borrow money to pay.
Oil/Gas – Santos and BHP
I wouldn't be against investors taking a punt on oil companies in the expectation that prices will move higher. However Santos in particular is a high risk bet as – like the miners, above – its debt will balloon out as the Australian dollar weakens against the US.
With Santos looking at selling prime assets to pay down debt, and one forecaster indicating the potential for oil to hit $20/barrel, oil stocks could be in for a further crunching.
The Banks
Much has been said on the banks, and while they look more reasonably priced now than they have previously, they still don't look like a screaming bargain.
Recent capital raising initiatives haven't had a chance to impact earnings per share yet, and that's before the likelihood of higher interest rates and an increase in bad debts over time is taken into account.
Slater & Gordon
Like Santos, I couldn't blame investors for taking a punt on Slater & Gordon, given that shares are now trading on a Price to Earnings (P/E) of roughly 6, compared to an average of 15 for the index.
However there are growing fears that the company grossly overpaid for its Quindell acquisition, as well as worries that the recent Australian Securities and Investment Commission (ASIC) inquiry might find some issues. Could be a good purchase, but I wouldn't rest my portfolio on it.
Telstra
Telstra looks fairly priced, and it does have a rock-solid dividend. Probably the pick of the bunch. Given the headwinds facing most of the other stocks however, I wouldn't suggest filling your portfolio with these businesses.
It's not a good idea for investors to continue feeding their fascination with banks and resources.
