Wednesday, November 17, 2010

Stock investing fundamentals and a slice of my portfolio

Getting excited about Agribusiness and Agriculture

It was interesting to read about fertiliser in the SMH Money back in October. It's always interesting to read about anything that covers my stocks and their industry. And yes, I have stocks in Incitec Pivot (ASX:IPL). They are Australia's largest supplier/manufacturer/producer of fertiliser. I bought the stocks at two separate intervals as you can see on my childish chart :)

There are a few emerging fields that have been of interest to me on the investment landscape. Uranium and nuclear energy, agriculture and agribusiness stocks. Just a warning that I'm not a purely ethical investor and my stocks may not necessarily be ethical stocks.

Food and water is something that is going to be a global issue. Fresh water supplies around the world are running low, if they're not polluted in the first place. Our inconsistent weather, droughts, cyclones and floods are damaging food crops. Arable farm land are being directed from food production into growing corn, sugar cane, manioc and potatoes to produce ethanol and fuel. The problem is that those farmlands were previously producing food for human consumption and instead they are now producing ethanol for fuel consumption.

The remaining arable land needs to be more productive and pushed to produce as much as they can. Hence, this is where fertiliser plays a role. Fertiliser can ruin rivers, dams and waterways but without fertiliser, land must be left to regenerate or else consecutive crops will deteriorate more and more. So by using fertiliser, farmers won't have to wait for natural land regeneration and they can plant their crops back to back on that same piece of land.

Wisdom from Australia's largest mining company

The world's biggest mining company BHP - an Australian company. Probably our one and only claim to having the world's biggest company in a singular industry. They provided some notes in their investor briefing:

  • Increasing demand for food
  • Decreasing arable land per capita
  • Shift to higher- protein diets (my note on this - particularly the Chinese population and their changing diets)
  • Need for more balanced fertilisation to maximise yields
Both BHP and Rio Tinto have expressed an interest in moving into the Potash busines. Potash is a key ingredient in the production of fertiliser. If you have the world's largest and second largest mining company directing their interest towards a field, it's worth having a look to see what their analysts and forecasters have been researching.

As an active investor (constantly buying and selling), if you see large companies starting to look at acquiring companies, your next move is to look for the companies that are prime takeover targets. Ideally find a good company to buy stocks in so that even if the company is never taken over, they are still great investments. If you're an investor, look for good, quality companies that you can happily hold for 3-5 years or longer.

What type of features should you look for?

These are some features that you should look out for. It's not an exhaustive list because this would have to be a text book to be an exhaustive list. But they are the main features that I personally use myself before investing in any particular stock.

Even if you start off with a great stock, the trading environment changes and you can find yourself with a dud stock. That's why you need to be investing in a handful of stocks and not just putting all your entire savings into a single stock or fund. If it was easy to get rich from trading or investing in stocks, almost everybody would be rich, however, this isn't the case.
  • One that has growing revenues and Earnings per Share(EPS) growth - eg: increased sales, innovation, new products and developments, expansion into different markets or international markets, acquisition of competitors that will provide cost savings and economies of scale
  • Check to ensure the PE ratios aren't too low(no potential) and aren't too high(overpriced) compared to their industry PE ratios
  • Check who are on the board of directors and management - steer away from companies where directors/managers have been previously involved with bankrupt and insolvent companies
  • Check to see their dividend payout ratio - beware of a company that has a high dividend payout ratio, they may not beable to sustain the dividends and this may artificially inflate yields
  • Check to see if they have any franking credits - this means the company has already paid tax on their dividends and if your tax rate is 30% or less, you will receive a refund or the credits will reduce your tax payable
  • Check to see if they have any contingent liabilities on the horizon - eg: a looming court case
  • Check their financial statements, financial ratios, analyst commentary, recent and historical news articles and mentions of them in the press
  • Check the cash flow and their cash holdings - be wary of companies with a lot of revolving debts and the ones requiring massive financing and loans that will require refinancing in this environment

If you're new to the game and you don't understand any of the above, it's probably best that you find a low cost ETF or Index Fund to plonk your money into. If you wish to dabble your toes into investing directly, open up an account with a broker (if you need human interaction) or an online trading account (if you're tech/net saavy) - and start off by buying a blue chip stock.

What are Blue Chip Stocks?

Good old trustworthy companies, with good trading history and stable revenues behind them. I've given a few examples below to start off with.

Blue Chip American Stocks: Apple, Coca Cola, Caterpillar, Google, Microsoft to name a few
Blue Chip Aussie Stocks: The big four banks (CBA/NAB/ANZ/WBC), the large mining stocks (BHP, RIO TINTO), the large retails stocks Woolworths (WOW), Coles and Wesfarmers etc

It's always unnerving to buy that first stock. When I got some free stocks from work, it was exciting but not as exciting as buying my first set of stocks. I remember when I bought my first few stocks, my heart was pounding ridiculously that it's pretty laughable to think about it now :) Once you own at least a stock in one company, you will find your knowledge and awareness increasing, watching out for the stock in the news, earning anouncements, price volatility and you will find your learning curve increasing exponentially in regards to stock investing.

You don't need to be a guru to start investing. Take that baby step of buying one stock to start you off on your learning curve. The younger you are, the more it will benefit you to learn as knowledge is rather powerful when acquired at a younger age. It means that you have many more years than someone older than you, to apply your knowledge and invest in an investment that will compound. I have my long term holdings on a DRP (dividend reinvestment plan) and they just keep growing and compounding every year.


  1. I enjoyed reading your article. You've provided a very good overview about stocks investing. Thank you very much for sharing this with us.

  2. Thanks for visiting my blog and for your comment. Investing in stocks and properties is a passion of mine and I hope to help others who are interested :)