Sunday, May 25, 2014

What Are Exchange Traded Funds And How Do They Work?

In his 2013 annual letter to shareholders, Warren Buffett put forward some ideas on ETFs. He discussed how in his will he's left instructions for 90% of the money which is to be held in trust for his wife to be invested in (low cost) ETFs. If one of the most successful investors in history is recommending exchange traded funds, maybe the rest of us should have a closer look as well.

What Is An ETF?

It's a product which provides investors with relatively low cost exposure to a broad range of companies or other invest-able assets. They are traded on the stock market just like the shares of listed companies.

An ETF tracks an index like the ASX300 or the price of a commodity like gold.  This means that investors should receive the same return as they would if the held all of the shares which make up the index, or in the cast of something like gold, it would be similar to buying gold.

Do Exchange Traded Funds Pay Dividends?

Whether an ETF pays dividends will depend upon the underlying assets it holds. If the fund owns shares in dividend paying companies then these will usually be distributed to fundholders.

If the underlying asset does not produce any income (commodities for example) then there would be no distributions. An investor would be relying on movements in the underlying asset's price to provide capital gains in their investment.

How To Buy Exchange Traded Funds

As already discussed, ETFs trade on the stock market just like normal shares. This means they can be bought and sold through your stock broker just like normal shares. And you can view their prices in the financial pages of newspapers, in the online financial press and through your online broker's website.

How Many Exchange Traded Funds Are There?

As I write this, there are over 70 ETFs listed on the Australian Stock Exchange. They cover areas such as:
  • Various Australian share price indexes
  • Specific sectors of the Australian stock market
  • Various international markets and their sectors. This can be a cost effective way of buying international shares.
  • Particular investing strategies (eg value investing, high dividend yield, etc)
  • Various currencies
  • Cash and fixed income
  • Commodities

The complete exchange traded funds list is published on the ASX website.

Read more here.

Saturday, May 17, 2014

Cheap Shares - 3 Companies Worthy Of Further Research

I am drawn to cheap shares as a result of my having both feet planted firmly in the value investing camp. Of course cheap can be a somewhat subjective term with different meanings for different investors.  However, a good starting place for me is normally to begin with stocks trading at or close to their lowest price over the past 12 months.

Here is a list if 3 companies whose shares are trading close to their lowest price over the past year and in which I intend to conduct further research.

ASX Code Company Name Current Price 12 Month Low
NOD Nomad Building Solutions Ltd 0.047 0.04
KSC K&S Corporation Ltd 1.31  1.28
WEB Webjet Ltd 2.33  2.30

Nomad Building Solutions Limitd (ASX:NOD)

According to it's website, NOD is a business "specialising in remote and regional development, construction and project management across Australia".

NOD is currently trading at a market capitalization of around $13m. While NOD is currently losing money, the most recent report to the ASX said they had $8.3m in cash. The company also has tax losses of $27m and $17m in franking credits on it's books. If the company can return to profitability, these tax losses and franking credits will add significant value.

I haven't quite my head around this one yet, but it looks like it's worth some further iinvestigation.

K&S Corporation Limited (ASX:KSC)

K&S Corporation operates a transport and logistics business.

What initially caught my attention with KSC is that it's trading at a discount to its $1.87 of net tangilbe assets per share. Historically it's had strong free cash flow and consistently paid out fully franked dividends.

The reason the share price has fallen is a drop in profitabilty in the most recent half year. I need to find out more about the reason for the fall in profits.

Webjet Limited (ASX:WEB)

Online travel agent Webjet is currently trading just a few cents above its yearly low share price. This is despite the company confirming it's still on track to deliver EBITDA of $21.5m this financial year.  As far as I can work out, this would put the company on a price earnings ratio of about 13.  This seems low for a company with a good track record of growing profits. Another one for the to do list.

More Homework

While each of the companies listed above has made it onto my short list, there is still much more work to do. It's always worth remembering that like all investments, cheap shares are often cheap for a reason.