Is a double-dip recession upon us?

With the All Ordinaries falling below 4000, many people are speculating about the possibility of a double-dip recession, which would potentially be more damaging than 2008; with Governments around the world no longer able to provide 2008 levels of stimulus to try and re-start their economies.  To me, there are 2 factors I’m considering in how to respond; Investing in industries robust to recession, and Identifying which companies will be the best long-term buys at historical lows.  I’m certainly not counting on Europeans nor Americans to increase economic demand however emerging and frontier markets are a massive resource.

 

Industries robust to recession

Telecoms and healthcare are 2 winners here, people are always making phone calls and getting sick.  Energy is another winner as people in frontier nations get power for the first time, and people in developing countries increase their demand.  There’s only one way to give electricity to the masses in developing countries, and that’s burning coal.  China is set to ramp up uranium demand in an effort to reverse the environmental damage of its annual 1.8 Billion Tonne thermal coal habit.

 

Long-term buys

Two companies I’m currently researching are BHP and Cochlear.

Cochlear were recently given both barrels by the markets after it announced  a recall of its 5th generation cochlear implant, and its main competitor received FDA approval to sell its product in the US.  Cochlear’s still the leading brand with the leading reputation, and the fact they have voluntarily recalled a product with a 1% rejection rate should increase the company’s reputation longer term.  They have huge untapped markets, with a technology that provides a great ROI for governments willing to shoulder the cost.

As the global leader in diversified mining, BHP’s executives target long-term asset life to enhance shareholder returns.  Making up 12% of the ASX200’s value, whenever the stock market gets smashed, so does BHP.  This creates some good buying opportunities.  I’ve researched BHP’s asset base and based on my limited resources knowledge it’s quality.

 

Other thoughts

One of the things that screwed a lot of people during the GFC was those who had to sell their shares due to margin calls.  I don’t think it’s ever a good idea to “optimise” your portfolio so as to be too leveraged to not be able to sustain a 50% drawdown.  While I’m using these tactics to model my portfolio, the broader strategy I’m using is based on professional development, spending less than I earn, and maintaining a healthy cash buffer.

Cash Converters – Risk Off (CCV)

The recent release of the Federal Government’s Consumer Credit Protection Amendments bill has rightly caused alarm for Cash Converters shareholders.

The premise of this amendment is to propose capping the fees for small amount payday lending, which would in effect make the Australian payday loans part of the Cash Converters business unprofitable.  Due to the contribution payday lending makes to the Cash Converters business, the share price has been promptly trashed.  Indeed, major partner EZCORP has pulled their original deal to raise their stake in CCV from 33% to 53%.

If the sort of capping that is being suggested is implemented, Cash Converters’ bottom line would be severely damaged.  Of the FY11 EBIT of $40.2M, $24.4M is as a result of the personal loans business and $12.3M is as a result of the cash advance business.  And while these outcomes mainly affect the Australian Market, the UK market’s loans business is still in its infancy.

Given these developments, and in spite of the fact that legislation is yet to be implemented; I decided the Risk Off approach was the best way to avoid permanent loss of capital, and exited my position in Cash Converters.

 

 

Supply Network FY11 numbers

Having steadily risen during 2011, from the 40c range to its current price of 69c, the thinly-traded SNL has been a standout performer, booking a 12-month shareholder return of 126%, thanks to price appreciation and an unbelievable 8c of franked dividends in FY11.

 

This begs the question, has this return reflected the underlying performance of this Truck and Bus parts business?  Despite sluggish revenue growth for the past few years, Supply Network delivered impressive 17% FY11 Revenue growth to $50m, EBIT growth of 46% to $3.8m, and Profit after Tax growth of 53% to 3.8m.  Given that FY10’s 3 year organic growth strategy was aimed at growing revenue by 7%, FY11’s performance suggest the strategy has been effective.

 

One of the key growth drivers for Supply Network is the new Mackay Branch, which services Northern Queensland and the Bowen Basin mining region.  This branch was opened in April and is already hitting their numbers, and given the new investment in bulk commodity infrastructure such as the Northern Missing Link; I’m bullish on Mackay’s prospects to contribute to further business growth.  But it’s not all about digging stuff out of the ground.  The truck business was nominated as a key foundation of business growth over the next several years, having grown by 20% in FY11.

 

SNL have been using the Dividend Reinvestment Plan to control gearing, and with this ratio now down at 21% the DRP has been suspended.  Throughout the investor summary the theme has been on steady organic growth.  The current 3-year transformation being 1 year ahead of schedule, management are now working on the next 3-year plan.  New branches are under consideration, but with a long-term view of customer service strategy each location would offer the business.  While SNL shot the lights out this year with 17% revenue growth, their target is 7%, compared to the industry average of 5%.  Next year’s guidance is 10%.  With careful management like these guys running the show, I’ve got plenty of confidence in SNL’s future.