Woolworths — you are making a fool out of me

Blue chip, high yielding stocks power the ASX higher. Although valuations are stretched, investors sell at their peril

Just when you thought blue chip dividend paying stocks couldn’t go much higher, the S&P/ASX 200 jumps back above the 5,100 mark, lead by banks, supermarkets and telecoms.

In fact, Woolworths (ASX: WOW) shares have recently hit an all time high.

The latest catalyst for the rising market was benign inflation figures, keeping the door open for for the RBA to cut interest rates even further from the current “emergency low” of 3%.

The Australian Financial Review hit the nail on the head, saying…

“The sharemarket reacted as if another rate cut was in the bag, as high-yielding stocks surged.”

The same publication quoted the exotically named Lee laFraté, chairman of Armytage Private as saying…

“The banks will continue to go up because of the high yield…”

Love those banks

Love is in the air.

One thing you can’t accuse Mr laFraté of is sitting on the fence.

Never mind that Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are already trading at record highs.

Or that National Australia Bank (ASX: NAB) shares are up a whopping 31% this year alone, with ANZ (ASX: ANZ) also trading at its highest level in six years.

According to Olivia Engel of State Street Global Advisors, retail investors generally have about two-thirds of their direct equity portfolio invested in the major banks.

Happy days.

And if Mr laFraté is ultimately proven right, the show ‘aint over yet.

Of course, it takes two to make a market, and there are some, like Ms Engel, who in the AFR, said she does not include banks in her list of defensive stocks, saying banks are “the most weary place for an investor to be looking.”

The mother of all portfolio hangovers

Weary is such a wonderful word. It describes how you feel the morning after consuming one too many alcoholic beverages. It also describes the state of your portfolio after one of those periodic days when every stock you own gets slammed.

Add alcohol and a bad day at the investing office together and you get the mother of all hangovers.

Spare a thought therefore for De Bortoli wines, one of Australia’s largest family-owned wine groups.

Common sense suggests alcohol and investing don’t mix, but that didn’t stop the De Bortolis giving it a crack. The result? The headline in The Age — De Bortoli takes $50m hit on stocks — doesn’t leave much to the imagination.

To be fair, the article does say De Bortoli’s stockmarket plays had previously been a wind in its sails, with profits from its stock trading eclipsing wine earnings in 2011.

But a “huge exposure” to collapsed North Queensland miner and former market darling Kagara, has pushed the Griffith-based wine group deep into the red in 2012 — and we’re not talking red wine.

It’s one thing to have a concentrated portfolio, but it’s another thing to put a whole heap of your eggs into one highly speculative mining basket-case, as Kagara has turned out to be.

Can I respectively introduce the portfolio pyramid to the De Bortolis?

Investing Pyramid

Motley Fool Share Advisor subscribers may already be familiar with the concept. If not, we cover the portfolio pyramid again in our most recent issue of our popular stock-picking service.

The growth level of the pyramid embodies potential — a company like Motley Fool Share Advisor recommended stock Seek (ASX: SEK) fits perfectly into this category.

Motley Fool Share Advisor subscribers who followed our advice and bought Seek when we recommended them as a buy in September last year should be feeling in a festive mood. It’s not often a popular large-cap stock jumps almost 70% in just 7 months.

We currently have a hold recommendation on Seek. The company is still growing incredibly quickly, and the long-term potential could be enormous, but the stock is a bit rich for our liking today.

This cheap stock is still a buy

One stock not so rich, yet with an added layer of risk, is Maverick Drilling & Exploration (ASX: MAD). I recently added to my existing holding in the stock. So far so good, as my new MAD shares are up 15% in a week. Nice work if you can get it.

It has been a bumper week for stock market investors, particularly those holding the bank shares.

Who’s the fool?

But, for all the (very) short-term gains in companies like Maverick, and the seemingly one way traffic in blue chip high yielding shares, it’s worth remembering investing is never perfect.

— Bank stocks have been on a roll, yet I’ve largely missed the party.

— I could have sold all my Maverick Drilling and Exploration shares last year at around $1.40, instead of just some of them. Today Maverick shares trade around 70 cents.

— My holding in another former market darling, rare earths miner Lynas Corp (ASX: LYC). I’m down 50% so far, and still holding, still hoping. On the bright side, unlike the De Bortoli family and their Kagara bet, my exposure to this speculative stock started off small (and is now even smaller!).

I recently recounted the story of how I sold some of my family’s holdings in Woolworths at $35.

Woolworths now trade at around $36.50, making me look like a fool.

I could invoke the old saying “you never go broke taking a profit” but that would be having my cake and eating it.

Whichever way you look at it, today Woolworths shares are making me look like a fool.

As ever, I wish you happy, profitable and ultimately Foolish Investing.

The dramatic run-up in the ASX 50 means many of our Aussie “blue chips” are trading for truly eye-popping prices. Yet, two of Australia’s most promising small companies are still flying under the radar.  Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Motley Fool General Manager Bruce Jackson owns shares in Woolworths, Lynas, Maverick Drilling & Exploration, ANZ, Commonwealth Bank and Westpac.

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