In the never-ending quest for the unpopular asset class that you might be able to pick up on the cheap it is difficult to go past commercial real estate at the moment.

But there are a few problems:

1. commercial real estate can be very illiquid
2. with the gearing in this sector, falling property values, and historically low interest rates that may increase, there may be risk in a particular fund that it is hard to identify

So what might be interesting would be a commercial real estate exchange traded fund that is both liquid and spread across a number of different property trusts.

In Australia you can find exactly this with the State Street Spider S&P/ASX 200 Listed Property Fund (roughly $15 billion market cap with 16 holdings and a .4% management cost with quarterly income distributions).

SLF Net Asset Value has halved over the last year

If your approach to buying stocks is chartist/technical, stop reading here because the chart (ASX:SLF)
 is a bit ugly to look at, with net asset value at 1/2 of its 12 month high, and down 2/3rds over the last 2 years.

SLF ETF fall in net asset value since Aug 08

We have started (and intend to continue) buying it in multiple small parcels and as a long term investment.

SLF income picture

SLF is currently trading at a  nominal double digit yield which is estimated to fall to about 8-9% i.e. you can assume that a further fall in income distribution is already factored into the current price.

Roughly 7 out of 10 of the top 10 holdings are trading at single digit PEs and the outlook from analysts for the whole property industry is still gloomy.

Stock-Specific Risk in SLF

It seems strange to talk about stock specific risk with an ETF but as of August 7th Westfield made up 47% of total assets so if you don’t like Westfield don’t buy this (here are the top 10 holdings): 

Here’s the sector breakdown:

Like it? Hate the idea? Let us know by commenting below!

Posted under index trackers

The current wholesale sell-off in global stock markets is leading to many a baby being thrown out with the bathwater! Inevitably there are some stocks which are being sold off which are sound businesses.  There are certainly far more exciting investment opportunities out there than there have been at for a good four years.  No doubt the forthcoming economic recession will have an impact on all industries, and most companies will see a significant reduction in revenue, profits and cash flow. Many however are currently being priced as if they will go bankrupt, or head into a long painful terminal decline. Some of these very undervalued companies might even manage to grow earnings in the forthcoming recession. 

Cable & Wireless: business segments and spin-off discussions

One example is Cable & Wireless in the UK.  Cable & Wireless essentially has two distinct businesses. The growing internet and broadband division for corporate customers in Europe, Asia and the US, and the International division which includes the legacy cash generative telecoms businesses in the Caribbean, Panama, Macau and Monaco.  For years shareholders have argued that the combination of these two divisions is not strategically compelling and that a demerger would be the best way to realise value.

Earlier this year management announced that they were considering strategic options including a demerger and returning cash to shareholders.  In the following months, the share price rose 20%, dramatically outperforming the sector, but in the last few weeks it has fallen over 30%.  Part of the reason for the recent stock price sell off is that management have suggested, quite sensibly in my view, that the current market turmoil is hardly the time to be realising value via a demerger and spin-off.  This does not signify a change in strategic thinking but rather a delay until more rational markets prevail.  

Cable & Wireless’s acquisition of Thus

C&W has also recently completed a takeover of its smaller UK rival, Thus.  Even after paying £361 million for Thus, the company will still be significantly underleveraged with a net debt position of £184 million, less than 10% of equity. The purchase of Thus, following on from the acquisition of Energis in 2005 gives C&W increased market share and helps them consolidate their position as a clear number two to BT in the provision of internet services to corporate customers in the UK.

Cable & Wireless: guidance and valuation

In the June 2008 interim statement, management said it was on track to achieve its guidance of a 20% increase in operating profits for this year. Let’s be conservative and assume that current economic circumstances mean C&W will not achieve any improvement in the underlying going concern this year or next. At the current price, this would put the business at a very reasonable 6.6X cash flow.  The dividend should be secure too; giving a current yield of 6%. Throw in likely cost savings from the Thus acquisition, and a potential special dividend from the eventual separation of the two key businesses, and it seems to me that Cable & Wireless is a bargain.

Disclaimer:  Note the author may hold investments in any of the companies mentioned in this article. Any new investment should only be considered in the context of the risks in your existing portfolio.

Posted under individual stocks

In the light of the 10% fall on Nasdaq yesterday we have been wondering today what might be out there in the way of opportunities (from memory the Nasdaq has now fallen roughly 50% from its peak).

There was a wholesale sell-off in the tech sector and we wondered whether everything should be tarred with the same brush. Just how similar say, are Dell and Ebay and Google in reality?

If you were looking to do some bottom-fishing for an opportunity then perhaps some worthwhile characteristics would be:

• a stock that was pretty well disliked
• a stock that had a nice balance sheet
• a stock that was well diversified across multiple markets and geographical sectors
• a stock without a sky-high valuation
• a stock where some of the analysis looks uninformed

People hate Ebay

Unlike internet darlings such as Google or Salesforce.com, Ebay’s halo is regarded as slipped by a lot of people, including Peter Lynch style investors who think because they use a product and it works it’s worth buying. Have a look at a 5 year chart and you’ll see it was trading at $58 3 years ago, as compared to 20 bucks today.  Analysts are pretty well split and there is ton of negative publicity out there from pissed-off sellers which you can find appended as comments to any discussion of the stock objecting to everything from changes to feedback ratings to Ebay’s attempts to ‘encourage’ their buyers and sellers to use PayPal.

Ebay’s balance sheet

Doesn’t look too bad. At a guess I would say there are going to be a lot of opportunities out there if you’re pulling in free cash flow of $2.1bn (2007) and you’ve got $3.4 bn sitting round to pick up other nice businesses which are not in such a good position because they’re busily building market share and not worrying about cash or profits and investors don’t seem to like that at the moment. And after probably seriously overpaying (from memory $2.1bn) for Skype they are hopefully not going to make that mistake again too quickly (management change might also suggest that with the departure of Meg Whitman).

Ebay is diversified

With basically 3 businesses: payments in PayPal, the much smaller communications business with Skype, and the merchant side auction business, Ebay has a few different bets. From memory about 40% of their income comes from outside the USA too.

Ebay’s valuation

Float over to Morningstar and you find Ebay’s fair value estimate at about $40. They say consider buying at $30. You can find some competitor analysis here but their price/sales, price/cashflow and PEG don’t look bad compared to some of their peers like Amazon, Google, and Yahoo.

Ebay angles off the analyst radar screen?

There may be a few bright spots that are being underestimated:

1. PayPal is growing fast. In Ebay’s Q1 2008 (April) financial results [Morningstar analyst quote] “total payment volume from the Paypal online payment service increased 17% on the eBay platform and a remarkable 61% off the platform” . By ‘off the platform’ they mean people using Paypal accounts to pay for other stuff via other websites. Whilst there are other competitors it looks to me like Ebay is leveraging their auction position (under the guise of ’safety in transactions’) to push Paypal where some of their competitors like Google can’t - another situation where Ebay could establish a pretty dominant franchise.
2. When money gets tight where do consumers go to buy the cheapest products? Pawnbrokers seem to have been valued on the basis that they might benefit from a switch downmarket as with cheap supermarket chains like Aldi. Why not Ebay?
3. Skype seems to be working better and better – there are lots of VOIP plays out there but call quality to normal phones seems to be good and there’s not a lot of other options when it comes to the utility of knowing people are there waiting to take your call and quick and easy ad hoc conferencing. For small businesses you could argue that Skype is becoming essential.

Other analysis of Ebay

Moneyweek: http://www.moneyweek.com/investments/tip-of-the-week-time-to-buy-this-chip-makers-plummeting-shares-13797.aspx

Motley Fool: http://www.fool.com/investing/value/2008/10/09/this-just-in-upgrades-and-downgrades.aspx

Posted under individual stocks