Best Shares To Buy In 2010

Buying shares over the past couple of years has certainly been a hair-raising experience for most of us. It's been an extraordinary roller coaster ride. The All Ordinaries index started 2008 at 4,882 before reaching a low of 3201 in November of that year. Then in March of 2009 we got lower still - down to 3,090 in March before finishing the year at 4,882. Overall in 2009 the index gained more than 33% or around 58% since the low point in March but that was a shocker of a year in 2008.

2008/2009 Share Price Graph

So what can we expect from the Australian stock market in 2010? Well quite frankly, your guess is as good as mine. But I think it's worth putting what we learned in 2008 and 2009 into practice in 2010.

What Did We Learn From 2009?

Well the first and perhaps most important thing is that investing in shares is a long term game.

While I like to consider myself a rational long-term investor, I must still admit that when the stock market went into free fall early last year, I was very worried. I found myself checking the prices of the shares that I own much more frequently than I should have been. And even when I was able to restrain myself, a colleague of mine updated me at least daily on the turmoil in Australian and world share markets.

Even though I kept telling myself that my investment strategy is to buy shares in good companies and hold them for the long term, there was still a part of me that wanted to sell my shares immediately and wait for the stock market to recover it's equilibrium before investing again. I knew that doing so would have resulted in missing at least part of the rebound when it did eventually come, but I was still worried. I kept telling myself that I should be focused on what share prices would be in 5 or 10 years time, not what they would be in the next 5 or 10 days.

So in 2010, good shares to buy will be those I'm willing to hold for the long term.

Buying Shares In Quality Companies.

The second lesson learned was to invest the bulk of my portfolio in businesses with strong balance sheets and a history of strong financial performance. If you managed to stick with this investment strategy, you would have managed to pick your way through the minefield of corporate collapses of the past couple of years. Don't get me wrong - your investments will almost certainly be worth less than there were a couple of years ago, but you have every chance of recouping your paper losses as the companies in which you're invested continue to grow and prosper. If a company in which you're invested becomes insolvent (as has happened in a number of highly leveraged situations) then your loss will be permanent. When the liquidator is finished there is not normally much left over for ordinary shareholders.

Fortunately (due to a couple of expensive lessons in the past) my portfolio has managed to survive the latest downturn unscathed. The vast majority of my holdings have little or no debt. And the companies I own which do have any level of debt, have sufficient cash flow to service the debt (plus some to spare).

As I have just alluded to, I lost money in in a couple of corporate insolvencies in a previous downturn. It was an expensive lesson but one which I suspect paid for itself many times over this time around. You see, I am a bargain hunter at heart. I love finding companies with cheap share prices relative to their assets or earnings. However, there is quite often a good reason why they are cheap - high levels of debt being one of those reasons. So these days I avoid investments where debt is a major factor.

Debt can be a company-killer. Bankers don't like to lose money and get very nervous when a business gets up a wobble. A banker is not usually the type of person who will say "...that's fine - just pay me back when you have the money...". They will generally want to see their interest paid on a regular basis and the principle repaid in full at the agreed time.

I should say that I looked closely at both ABC learning and Babcock and Brown when their respective share prices plummeted. I concluded that if they survived, they would turn out to be screaming bargains. However, while their survival was at all in doubt I resolved to stay away. Though I should admit that a previous me would have jumped on board both of those trains.

So in 2010 the best shares to buy will be those with sound balance sheets and strong financial performance. I need to maintain my commitment to avoid any investment opportunities where there is a real risk of permanent loss of capital.

Selling Shares To Raise Capital

A common theme in 2009 was capital raising. A staggering number of companies, many of them blue chip, went out to investors with their hands out, asking "Please sir, may I have some more?"

While it was necessary for many companies to repair their balance sheets through the issue of new shares, unfortunately the capital raisings were at discounts to already depressed share prices. This of course has a dilutive effect. A company which has the same profits this year as it did last year but which issued new shares during the year will have correspondingly lower earnings per share. Put simply, you get a smaller share of the profits.

As an example, imagine a company which last year had 10 million shares on issue and made a profit of 10 million dollars. This would equate to earnings per share of $1.00. Now imagine that the company had sold an additional 10 million shares in order to raise capital to strengthen its balance sheet. If it earns the same 10 million dollars as last year but now has 20 million shares outstanding, the earnings per share will only be 50 cents. This might be an extreme example, but hopefully it illustrates my point.

Will Gold's Bull Run Continue?

The following graph shows the performance of gold in US dollars over the past 5 years.

Gold Price Over 5 Years

As you can see, there is a very strong upward trend. The question is whether it will continue. I have to admit that I don't know a lot about what drives the price of gold. However, I do know that it does well in times of uncertainty and that it is considered by many to be a hedge against inflation.

With the recent stimulus packages delivered both in Australia and overseas, inflation is the word being uttered furtively in economic circles. Warren Buffett warned of the risk of inflation on the New York Times in August last year. So perhaps some exposure to gold might not be a bad thing. I have written on how to go about investing in gold before.

What About Buying Bank Shares?

The big four Australian banks seem to have increased their stranglehold on the residential mortgage market since the global financial crisis - but are they good shares to buy? I've already mentioned the effect that capital raisings will have on earnings per share. And I'm pretty sure that all of Australia's major banks have raised capital over the past 18 months.

Another risk is that regulation will be introduced tightening capital requirements for banks (if you're ever having trouble sleeping, just try reading about capital adequacy requirements). This will lead to lower returns on equity and ultimately lower returns for shareholders.

The last thing to consider before investing in bank shares is the likely impact of higher interest rates. It seems we are past the low point in the interest rate cycle, at least in Australia. As rates continue to rise we will probably see slower credit growth in Australia as people borrow less. This in turn will lower the rate of profit growth of our banks.

What About The Strong Aussie Dollar?

The last thought I'll leave you with is related to the strong Australian dollar. It may be worth considering what further strength in the Australian dollar would mean to your investment portfolio or alternatively what a drop in the exchange rate would mean as well. Certainly, companies with significant US dollar earnings feel the pinch when the dollar is high.

If you've ever considered buying international shares, now might be a good time as well. You'll get more bang for your buck and if the dollar does start to lose value later in the year, you will end up with foreign currency gains as well. But as I've written in the past, your gains will turn into losses if the exchange rate moves the other way.

Good luck buying shares in 2010!

2010 Share Market Floats - What Can Investors Look Forward To?

What will 2010 deliver to Australian stock market investors when it comes to new share floats? Hopefully, the worst of the global financial crisis is now behind us. After a fairly slow year in terms of the number and size of Initial Public Offerings, companies which had temporarily put their share float plans on the back burner may now be taking a second look at the market.

I think one of the reasons that 2009 was such a bad year for new share floats was the amount of competition for investment dollars. Investors could snap up a bargain pretty much anywhere they cared to look in the first half of 2009 (provided they were looking - some investors were too scared to go anywhere near the stock market given the massive falls an 2008, which continued into the early part of 2009).

Why would someone take the risk of investing in the Initial Public Offering of a company with no history as a publicly listed entity when there were businesses with long histories and strong track records up for grabs? The other area of competition was in capital raisings. With dozens of companies (many of them large and well-known) repairing their balance sheets by offering new stock to investors at a discount to already depressed prices, nobody was interested in the new guys.

There were only 40-odd new share floats in 2009. Of these, only 3 were of any substantial size - Carsales.com, Kathmandu and of course Myer.

So what are the upcoming share floats investors can look forward to in 2010? Well as usual, rumours abound. But here are a few of larger IPO's which may well get a guernsey this year.

Link Market Services

I have read in several places now this share registry service provider is planning an IPO. The business is currently owned by private equity firm Pacific Equity Partners. According to Christopher Webb who writes for The Age, the financials for Link Market Services don't look too flash though. If a Link Market Services share float is on the cards, it will be interesting to see how the sale is marketed to investors.

Ascendia Retail

Another private equity owned business, Ascendia Retail has reportedly engaged investment banks Goldman Sachs and UBS to advise on a possible stock market listing this year. Archer Capital own the group which operates the Rebel Sport and Amart Allsports retail chains. No doubt those involved in the Ascendia Retail share float will have been watching the fortunes of the Myer and Kathmandu IPO's very closely.

QR National (Queensland Rail)

Part of the Queensland Government's planned privatisation bonanza, the $7 billion QR National will list in the second half of 2010. The company will operate Queensland's coal and freight rail network. This is likely to be the largest Initial Private Offering of the year. Apparently priority in the QR National share float will be given to Queenslanders with staff reportedly receiving $1,000 worth of free shares and up to another $4,000 at a discount.

Other household names rumoured to be considering a public listing include cinema chain Hoyts, women's fashion retailer Witchery and Vacuum Cleaner specialist Godfreys. Along with the inevitable flood of speculative mining companies, investors in IPO's may well be spoilt for choice in 2010.

How To Buy Shares In Australia

My sister asked me a good question the other day. She asked "How do I buy shares?"

Of course I launched into a long and detailed explanation involving dividend yields, return on equity and interest coverage ratios, at which point she interrupted and told me she just wanted to know how buying shares works - how you physically purchase them.

Buying stocks for the first time can be a daunting experience. There is a lot of new terminology which seems especially designed to confuse new investors. So this article is aimed and beginners who what to learn how to buy shares.

Why Do You Want To Buy Shares?

First a quick recap. Before taking the plunge it's worth thinking a little about your reasons for investing. While stock market investments have performed well over the longer term they can be a little volatile over the short term. You only need to look back at the behaviour of world equity markets in late 2008 and early 2009 to see evidence of this.

For this reason, most people consider shares to be a medium to long term investment (sure, there are stock traders who only hold positions for days or even hours before selling but that's another story). Three to five years or longer is typically quoted as a reasonable holding period. So if you're looking for somewhere to stash the money you're saving toward that holiday, the stock market is probably not the place.

What Do You Get When You Buy Shares?

It's important to understand that when you invest in equities, it's more than just a ticker symbol you see quoted in the financial newspapers or on the news at night. You're buying a part ownership in a company - a real business. I think that's a critical point to remember. It's not like money in the bank or a term deposit - you own a small part of a business.

As such you're hoping that the business will grow and that your stake in the business will grow along with it so that you will one day sell your stake for more than you paid for it. You would probably also expect some income in the form of dividends along the way.

So, How Do You Buy Shares?

In practical terms, there are really two ways to invest in shares. You can buy them when a company floats on the Australian Stock Exchange or you can purchase stock in a publicly listed company 'on market'. (There are actually special circumstances where you can purchase shares off-market but these scenarios are beyond the scope of this article.)

Buying Shares In A Float.

When a company lists on the Australian Stock exchange it's called a float. What typically happens is that shares in the company are offered to the public in what's called an Initial Public Offering or IPO.

The company must produce a document called a prospectus which contains information about the history and nature of the business, financial results, any risks inherent in the business and what the future plans for the company are (including what they plan to do with the money raised by the offer). It's a very important document and should be read very carefully by any prospective investor.

It's worth noting that Telstra and Commonwealth Bank shares are the exception when it comes to stock market floats. Typically new companies listing on the ASX are much smaller with shorter operating histories than these two blue chip behemoths. And a fair proportion are outright speculative punts - junior oil and minerals explorers looking for a big resource discovery.

However, if you know what you're looking for, you can occasionally find solid businesses with a good record of profitability listing at reasonable valuations. It can be a good opportunity to get in early on a fast growing company. CSL and Cochlear are two companies which come to mind. Investors in the original float of either of these companies would be sitting on very tidy profits right now.

Although it probably shouldn't be a big consideration, you should also know that there is no brokerage payable when you invest through an IPO.

Buying Shares Through A Stockbroker

Types Of Broker

Full service brokers provide advice to their clients. They will provide recommendations on how to invest your money including what specific stocks to buy and sell. You will normally pay more for this level of service.

Discount brokers will allow you to buy and sell stocks but don't provide personal investment advice. They sometimes offer research information which is general in nature. Their brokerage fees are generally lower.

And speaking brokerage, that takes us nicely into the other main way of buying shares - on the sharemarket through a stock broker. When you buy shares in publicly listed companies through the stock exchange you're buying from another party. You're not buying from the stockbroking firm or from the company itself. There needs to be someone selling in order to buy. The seller may be a private investor like you or they may be an institution like a fund manager. The thing to remember is that you're buying a piece of a business from another party.

Shares listed on the Australian Stock Exchange need to be bought through a stockbroking firm. The stockbroker is responsible for executing purchase and sale transactions on you behalf. For this service they charge a fee called brokerage.

In order to operate as a share broker in Australia, you must be licensed by ASIC (the Australian Securities and Investments Commission). To be safe you should check that your broker is licensed by ASIC.

Before a stockbroker will accept your order, you'll normally have to set up a trading account with them. This is usually a fairly straight forward affair and shouldn't take more than a few days to to complete the process.

Most brokers will also need your bank account details. This is so that funds can be transfered to and from your account to pay for any purchases or receive the proceeds from any sales.

Order Types - 'At Market' and 'At Limit'

When it comes time to make your purchase, there are 2 types of order you can place - 'at market' and 'at limit' orders.

At market orders mean that you are seeking to purchase a set number of shares in a company at whatever the prevailing market price is at that time. So in effect, you will be accepting the offer of a seller who is selling at the lowest price.

At limit orders differ in that instead of just buying at the prevailing market price, you set the price at which you're willing to buy (or sell). This may be above or below the current market price. If you place an at limit order below the current market price, you will need to wait until the share price drops to that level before your order is executed. If the price doesn't get that low then your order wont be executed. I think under ordinary circumstances your order will be valid for 30 days before being purged from the Australian Stock Exchange system. There are a number of exceptions to this rule - I think one of them is when a stock goes ex-dividend.

Most brokers allow you to place orders to buy shares online or over the phone (check out the brokerage fees as they sometimes differ depending on the method you use to place your order). Whichever method you choose, make sure you check, then double check the details of your proposed transaction (make sure you don't have too many zeros), as once the trade takes place you are committed.

Settlement

Once your trade is executed, there is what's called a settlement period of 3 (business) days. After 3 days the broker 'settles' the trade - they will take the funds from your bank account to pay for the transaction and you will then be the legal owner of those shares.

Unlike in the old days, you wont actually receive a paper share certificate. What you will receive is a CHESS Holding Statement. This statement lists your current shareholding along with any recent transactions. The CHESS system is responsible for handling the settlement of stock market transactions and for maintaining who is the registered owner of each parcel of shares.

There are 2 options for managing your shareholdings. You can choose to be Broker Sponsored or Issuer Sponsored. If you're Broker Sponsored it means that your stockbroker is able to manage your holdings on your behalf. With Issuer Sponsored, the company you hold shares in will manage the holding. Visit the ASX website to find out more about the differences.

I find being broker sponsor to be more convenient as all of my holdings are grouped together and if I ever need to change any details (like my address) it all gets done in one go.

What's Next?

You've probably noted a glaring omission from the article - choosing the best shares to buy. Well that topic is a whole series of articles in itself. I have offered some of my thoughts on this topic in the past and I'll share some more in an upcoming post.

Kathmandu IPO - Kathmandu Shares Set To Float

Hot on the heels of the initial public offering of Myer shares comes the Kathmandu float. It seems that the present owners of the outdoor goods and clothing retailer have judged that now might be a good time to sell down their stake given the recent strength in Australian shares and the high levels of demand being reported for Myer shares.

The Kathmandu prospectus is available from the kathmanduholdings.com website. The retail offer is set to open next Tuesday and close at COB on 6 November. The share offer is expected to raise between $278M and $375M through the sale of between 167 and 197 million shares at a price of $1.65 to $1.90. The proceeds of the offer will be used to pay down debt, fund the cost of the offer with the balance going to the present owners of the company.

Kathmandu was bought from founder Jan Cameron by Goldman Sachs JBWere and Quadrant Private Equity in 2006 and they are now looking at taking some money off the table. It has been reported that they may retain a stake of up to 15% in the listed entity but I suspect that will depend upon demand.

In order to buy shares in the offer you need to purchase through a broker who has received an allocation. There is some stock available to employees with the rest being sold in an institutional offer.

Kathmandu shares will be listed on both the Australian and New Zealand stock exchanges. The retailer operates 84 stores in Australia, New Zealand and the UK and is looking to open another 18 stores.

Myer Prospectus Released

Here is the latest update on the initial public offering of Myer shares.

Today the prospectus was made available for download on the Myer website. I have downloaded it and had a quick scan through.

One thing that struck me is that there is no application form. As far as I can tell, retail investors have 3 options to invest in the float:

• as a staff member of Myer;
• as a member of the loyalty card program; or
• through an allocation from a stock broker.

If you don't fall into one of these categories, the prospectus says that you will be eligible if you're a member of Myer One loyalty card program on 23 October 2009. I guess that means you still have time to become a member.

The offer will be priced between $3.90 and $4.90 per share with the final price to be set upon completion of the institutional offer.

It seems that demand will probably be strong as I read in The Age today that 140,000 investors have pre-registered their interest in the share offer.

Myer Float - How To Buy Shares In The Myer IPO

Since my post yesterday on the IPO of Myer shares, I've had a couple of questions about how investors can get access to the float. As I mentioned yesterday, the strong brand name will probably attract lots of retail investors to the float and I guess people are worried about missing out.

According to the offer website, as long as you become a Myer One member by 5:00 pm on Friday 25 September, you will be eligible to preregister and have your prospectus mailed to you along with a personalized application form.

But I also read in the FAQ that you will not receive any priority by preregistering.

"If you apply for shares under the Myer Share Offer, you will be treated the same whether or not you have pre-registered."

So there appears to be no reason to panic just yet. Although there has been speculation that preferential treatment would be given to loyalty card holders, the information in the FAQ does seem to contradict this.

If you're worried about missing out, maybe the safest bet is to join up to the loyalty card program before Friday. That way you'll be covered if investors who preregister their interest in the IPO do receive preferential treatment in the Myer float.

Myer Shares Set To Float

It looks like Myer shares will once again be available on the Australian stock market. The Myer IPO (Initial Public Offering) could well be wrapped up by the end of the year.

According to the www.mypieceofmyer.com.au website, the group "currently intends to lodge a prospectus with the Australian Securities and Investments Commission for the offering of shares in Myer Holdings Limited on or about 28 September 2009".

With the ASX indices racing ahead over the past few months, it may well be an opportune time for the float, providing the Aussie sharemarket doesn't fall over in the next month or two. We've managed to get through the 1st anniversary of the GFC, but October has been a diabolical month for investors in years gone by - although not so much in recent years.

Pre-registration for the Myer float is only available to the company's staff and for Myer One loyalty card members.

The TPG (Texas Pacific Group) led private equity consortium took the iconic retailer private just over 3 years ago. Since then they have managed to increase profits and (not surprisingly) management say that recent trading has been strong.

The interesting thing for me will be the structure of the new listed entity's balance sheet - or more specifically, how much debt it carries. The modus operandi in most private equity deals is the use a lot of leverage (debt) in the buyout. Sometimes when the shares are floated they still carry a significant level of debt. Repco is one of those situations which comes to mind. The cyclic nature of retailing along with excessive debt can be a risky combination.

I suspect that the issue will still be popular though. It is a well known brand which along with some heavy marketing aimed at retail investors should ensure the Myer share float is successful.