Mid-Week Update: December Best Buys Now
By Scott Phillips - December 13, 2012
Thursday December 13, 2012
Dear Motley Fool Share Advisor Member,
Welcome to the second edition of Motley Fool Share Advisor Best Buys Now.
At Motley Fool Share Advisor, our aim is to bring you our best ideas every month.
We had some great feedback from our inaugural Best Buys Now update, thank you.
As always, our best idea each month will be contained in our monthly issue, released on the fourth Thursday of every month. The next issue will hit your in-box next Thursday 20th December, after the market closes. (We’re sending it a week earlier than usual due to the Christmas break).
For any number of reasons, some of our members won’t be comfortable buying that recommendation (a course of action we endorse — if you buy something you’re not comfortable with, you’re much more likely to sell if the waves get a little rough), or may already have it in their portfolio.
Some members may have joined more recently, and want help to assess our previous recommendations, while others may want to make two or three purchases in a given month — either because they’ve come into some extra money, or they’re selling shares in a company they own, and are looking to redeploy the proceeds.
In any case, our approach to Best Buys Now is that the most recent monthly recommendation is our single best idea, and we’ll provide the names of the best three additional ASX ‘Best Buys Now’ from the companies currently on our scorecard (chosen from the group which are obviously still rated as Buy).
More right than wrong
As we mentioned last month, we shun trying to be ‘exact’ in our assessment of companies’ prospects and prices. Of course, not being exact doesn’t mean we don’t try to be right.
In our investing approach, we aim to live by the maxim of being ‘roughly right, rather than precisely wrong’.
Accordingly, our three Best Buys Now are listed simply in alphabetical order.
New
Domino’s Pizza (ASX: DMP)
Our most recent recommendation, Domino’s Pizza, is the dominant Australian home-delivered pizza chain, and has been expanding here and overseas. It continues to grow its sales and expand its margins, while innovating in all parts of its business – from menu improvement to social media and even making its delivery fleet more environmentally friendly.
The price has moved up since our recommendation, but we think this is a company with a bright future. Its 2.6% fully-franked dividend isn’t among the world-beaters, but is a nice yield for a company still in its growth phase.
Best Buys Now
Integrated Research (ASX: IRI)
Issue: December 2011
Integrated Research makes the Best Buys Now list for a second-straight month. After all, a couple of months ago we named the company The Motley Fool’s Top Stock for 2012-13.
We remain impressed by the business, and — most importantly — its ability to capitalise on a bright future.
From a standing start in 2001, its ‘Unified Communications’ (UC) business has recently become its largest. As that growth continues, it stands to accelerate the overall performance of Integrated Research.
You can see the impact in this chart its recent AGM presentation:
Source: Integrated Research 2012 AGM Presentation
We’ve got our eyes firmly on the blue line as the growth driver of the business.
Integrated Research trades on a trailing P/E of 22.6 and offers a 4.1% dividend yield, franked to 70%.
The opportunity for Integrated Research investors isn’t in this year’s earnings, however, so we’re not giving the current P/E too much weight — it’s the future profits that matter.
Metcash (ASX: MTS)
Issue: August 2012
The number three player in Australia’s grocery market has had a rocky few weeks. As we noted in a recent weekly update, Metcash recently downgraded earnings for the current financial year due to a combination of cash and non-cash writedowns related to store closures and restructures.
The shares have fallen, partly as a result, and now sit around our original recommendation level.
When we recommended Metcash, we made the point that the dividend was doing much of the ‘heavy lifting’ for us. As long as the company maintains the current dividend, that will remain the case. At today’s share price of around $3.15, Metcash is trading on a trailing dividend yield of 8.9%, fully-franked (which grosses up to 12.7% including franking credits).
We expect some profit growth over time which will add to the investment returns.
This is a situation which may take a little while to improve — though signs that the major supermarkets might be finally withdrawing from aggressive discounting bode well for Metcash’s sales and margins.
QBE Insurance (ASX: QBE)
Issue: February 2012
Our QBE thesis hasn’t changed since last month, but the share price has fallen back a little to around $10.50.
We can’t add much more to last month’s commentary, when we said:
“Put simply, the market is an impatient place, and a business with lumpy earnings doesn’t win many friends. Looking ‘through’ the economic cycle to find average earnings isn’t a strong suit of Mr. Market, and that gives us an opportunity.
To be fair, QBE did also take the opportunity presented by Hurricane Sandy to add in some unrelated profit downgrades, which were as unexpected as they were unwelcome. It’s something we’ll be keeping our eye on, but it may well be a new CEO cleaning house as he takes the reins.
In any case, the current share price puts QBE on a P/E of around 13.4 times downgraded earnings — a profit number we think will be well below the long term average of the company. That makes it cheap, in our view.”
QBE is well out of favour with investors at the moment — poor US bond yields and a series of disappointing announcements have tested the market’s patience. We think the underlying business is worth our patience.
The company is currently trading on a trailing P/E of 17.5 times depressed earnings and is sporting an 8.1% dividend yield, franked to 25%.
Coming Soon — Weekly update and next issue
As always, we’ll bring you our Motley Fool Share Advisor weekly update next Monday afternoon after the market closes.
And then, as we mentioned above, keep an eye on your in-box next Thursday December 20th for Motley Fool Share Advisor’s next monthly issue, where we’ll reveal our very latest best of the best ASX stock recommendation.
If you’re keen for some Foolishness while you wait, we’d recommend you take a look at some of our past issues.
If you’re on Facebook, you can like us here, or you can follow us on Twitter.
Yours Foolishly,
Bruce Jackson and Scott Phillips
Motley Fool Share Advisor
Visit the Motley Fool Share Advisor website to view past issues and weekly updates.
Disclosure: Of the companies mentioned in this email, Scott Phillips owns shares in QBE Insurance. Click here to view The Motley Fool’s disclosure policy.
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