Thursday, June 26, 2008

ABC Learning Share Price Recovery

Shares in ABC Learning were one of the better performing issues on the Australian stock market today. After reaching new lows this week, they finished up 30% today still a far cry from the $8.00 plus all time high, but much improved from their low of 65 cents this week. Only yesterday I wrote about this week's share price weakness in ABC Learning Shares Plumb New Lows.

The recovery appears to be in response to an announcement released to ASX today which said that ABS had completed the sale of 60% of its US Business to Morgan Stanley Private Equity. The announcement also stated that ABC Learning has received the cash proceeds of the sale. As far as I can tell, some of the proceeds will be used to reduce debt levels at the company.

The transaction values the US Business at US$700 million. ABS still retains ownership of 40%. One of the interesting parts of this deal is a call option for ABC Learning to buy back the 60% from MSPE in 3 years. It seems they really want to keep pushing into the US.

Today's share price recovery is impressive. While the Australian stock market is up overall today, the ABS gains put it way ahead of the index. The investing public are obviously happy with the deal.

Wednesday, June 25, 2008

ABC Learning Shares Plumb New Lows

ABC Learning (ASX Code ABS) is the largest listed childcare provider on the Australian Stock Market. As I wrote in a previous ABC Learning post, it has traded at over $8.00 at its peak about 18 months ago. Since then, it's share price have been on steady (and at times alarming) decline. It reached a new low of 65 cents yesterday.

Earlier this month, a placement of 71.5 million shares at $1.15 to MSPE and Lazard raised $82 million dollars. This represents 15% of the company's issued shares (the most that can be raised without shareholder approval). Since then general market weakness and some poor ABS publicity has left MPSE and Lazard sitting on a reasonable sized paper loss (although ABC Learning shares have recovered a little to close at 73 cents today.

Some of the cash raised along with some of the proceeds of the sale of its US operations are apparently going to be used to pay down debt. Hopefully more reasonable debt levels will reassure investors as to the long term viability of the company.

Surely the underlying business of ABC Learning is strong and profitable. Government childcare subsidies are on the rise again. And ironically, yesterday with its shares plumbing new lows, ABS had announced that it was raising child care fees by 10%. Although such a fee increase generates a lot of negative publicity, it demonstrates the strength of ABC's business.

While I find this to be a very interesting investment opportunity, there are 3 things which hold me back. First off, I find it hard to get a handle on what's happening inside the company. I read the announcements but they don't seem to contain quite enough information for me to be comfortable with the financial position of the company.

Secondly, I suspect the main risk the company faces (apart from its high debt levels) is weakness in the Australian job market. Predicting such things is well beyond my capability but with rising interest rates and declining consumer confidence, the unemployment rate may well continue to rise.

And last, but certainly not least, the Australian Stock Market currently presents a number of other lower risk investment opportunities. The current share price weakness sees many blue chip companies trading at the most reasonable valuations in years. Every time I look at ABC Learning, I can't help thinking about what better opportunities there may be.

Tuesday, June 24, 2008

Australian Stock Market Weakness A Buying Opportunity?

The Australian Stock Market is approaching a three month low this week. After a brief rally it's all doom and gloom once more - just in time for the end of the financial year. So does this mean it's a good time to buy Australian shares?

I guess it depends on your time frame and your outlook. If you're a long-term investor or a fan of value investing, then these sorts of conditions are right up your alley. But if you're a speculator looking to make a quick buck, it might be a little risky.

I suspect that one of the reasons for the recent share price weakness, apart from the obvious ongoing turmoil in the debt markets, is the fast approaching end of the financial (tax) year. At this time of year some investor like to look back on the profits they've taken during the year then look at their portfolio to find any losses they might be sitting on. By selling out of any losing positions, they can crystallize their loss for tax purposes and offset this loss against other gains.

If you're thinking of engaging in the above strategy you'll need to be careful. There are situations where the Australian Taxation Office take a dim view of this sort of activity. I think the problem arises when you sell the buy back in straight away and the only purpose of the transaction is to generate a tax loss. Make sure you talk to a tax professional if you're considering doing this.

Apparently one of the other reasons for volatility at this time of year is because the fund managers are re-balancing or 'window dressing' their portfolios. I dare say the the Superannuation Funds are very busy right now trying to salvage some sort respectable result.

Another way of looking at the current state of the markets is as a second chance. For those of us who hadn't bought everything we wanted to before the recent recovery, it means we get another bite at the cherry. I certainly thought that prices were recovering and that I'd missed the low point. Now we all get a second chance to top up our portfolios with good quality Australian stocks.

Thursday, June 12, 2008

Australian Stock Market Investing

Investing vs Speculating on the Australian Stock Market.

What is the difference between investment and speculation? Unfortunately many people tend to confuse the terms and even use the two interchangeably. In this post I'd like to put forward my views on what the difference is and how it applies to the Australian Stock Market.

In his book, Security Analysis, Benjamin Graham discusses the difference between investing and speculating at length. Graham describes the difference between the two succinctly using the following words:
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

I think this sums it up nicely. If you approach each stock market investment with Graham's words in mind, you cannot help but do well over the long term.

The concern I have with speculation is that there is not normally any fundamental basis for entering a particular investment. A stock is bought because there is an expectation that the price will rise (normally over the short term) and it can then be sold at a profit. The problem lies in the fact that the expectation of a rise in price is based on observations of whether the price is rising or falling, or on what the price has done in the past. It seems to be solely about identifying patterns in price and volume.

The issue I have with this approach is that price does not necessarily reflect the value in the company. Over the course of weeks or even days a company's share price can fluctuate wildly without any news from the company in question. Is it possible that the fundamentals of the company have changed so dramatically over such a short period of time? In most cases it's unlikely. Sure - there are cases where a major change in the company's fortunes becomes known to the stock market leading to a change in valuation of the company's shares. But in most cases it's just investor sentiment driving prices.

So the next time you consider the purchase of a company's shares you should bear Graham's words in mind. Do you understand the company well enough to be confident of it's fortunes into the future? Is there sufficient value present to justify the price being asked? If you can't answer yes to both of these questions, should you really be investing? Remember that you can afford to pick and choose. The Australian stock market continues the throw up opportunities for patient investors.

Thursday, June 5, 2008

Australian Stock Market Basics

The Australian Stock Market has had a rough ride in recent times. The major market indices have come off the boil over the past year or so after a run of stellar gains over the preceding years. This recent market turmoil has seen many beginner investors sitting on the sidelines waiting to see what happens next. For those considering buying into shares, this post will discuss some of the basics of investing in the Australian Stock Market.

Let's start with the Australian Stock Exchange also known as the ASX. This is the organization responsible for maintaining the main share market in Australia. While there are other exchanges in Australia (the Newcastle Stock Exchange or NSX comes to mind) the bulk of equities are traded on the ASX. If you want to buy shares, you'll need to do it through the ASX. But you can't buy directly from the ASX - you'll need a broker, but I'll come to that later.

Before going any further, perhaps we should go back and look at what a share is since this is what's changing hands on the ASX. A share represents ownership of a small portion of a publicly listed company. Each share entitles the owner to a proportion of the company's profits which are distributed as dividends. It also gives the owner a say in how the business is run by allowing them to vote at the company's annual general meeting as well as any special meetings which are called throughout the year. This concept of ownership is an important one to grasp. When you buy a share you're buying part of a real business, not just a symbol for which prices are quoted daily in the newspapers.

That leads me nicely to my next point. In my opinion, most of your stock market investments should be long-term. You should be looking at 5 years or more. This means buying quality companies and holding onto them as their profits and dividend payouts rise. This will help you to ride out short term market fluctuations and hopefully allow you to profit handsomely over time. The other advantage of being a long term investor is that you will lower your costs. Your stock broker makes money each time you buy and sell, and the Australian Government takes their share as well in the form of capital gains tax.

And speaking of stock brokers, make sure you get a good one. There are discount brokers around (the most well known of those is probably ComSec) and while they normally provide free company information and research, they don't normally offer individual advice. A discount broker may be fine if you know what you're doing but if you're still coming to terms with the basics, a full service broker might be the way to go. A list of brokers is available through the Australian Stock Exchange.

One final thing to keep in mind is that with compulsory superannuation, most of us already have exposure to the Australian stock market through our super funds (this has probably become quite apparent looking at the recent returns from our super funds). The percentage invested will typically depend on what option you have chosen. The more aggressive options tend to have greater exposure to equities. So when we're considering investing in shares we need to remember that most of us already have some if not a significant exposure through our superannuation.

That's all I have time for today. While this post really only scratches the surface, the main points I wanted to get across are that when you buy shares, you're actually investing in a business and you should definitely think of it that way. And as such you should be taking a long term view. You wouldn't buy your local mixed business one week just to sell it the next would you? I'll discuss more Australian stock market basics in my next post.

Sunday, June 1, 2008

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