Thursday, July 10, 2008

The Stock Picks From Hell

Jim Parker, Regional Director, DFA Australia Limited

Whenever equity markets turn rocky, we're told that stock pickers start sharpening their pencils and proving their worth. So with the year half over, it's interesting to note how the "hot stock picks" for 2008 are panning out.

Late last year, Sydney's Daily Telegraph decided to ask some of Australia's "leading analysts" for the "inside word on the hottest stocks for 2008".1

Six analysts from six separate broking and financial services firms were selected to provide a handful of individual stock selections—the cream of the cream, the best of the bourse, the flower of the flock.

But looking at the dire performances of their individual selections, one is left wondering whether the tipsters mistook their bottom drawer for their top.

Even taking into account the fairly ordinary performance of the overall Australian market this year (down 21 per cent as of early July), the Daily Tele's "hottest stocks for 2008" appear to be very cold fish indeed.

Of the 27 stock tips, all but three had underperformed the market by early July, many of them significantly.

Retailer Harvey Norman, we were told, would continue to benefit from falling prices for electronic goods imports and the strong Australian dollar. Maybe it is, but that's not reflected in its share price (down 54 per cent year to date).

Major debt collection group Credit Corp was said to be due for a rebound, having been hammered in 2007. Well, as it has turned out, the hits have just kept on coming, as Credit Corp shares are down 80 per cent in 2008.

Another analyst told readers that Babcock & Brown Power was likely to be a strong performer this year, given its focus on gas-fired generation—or maybe not, because this particular stock was down 73 per cent as of July.

Elsewhere, Regional Express, we were advised, was "the forgotten airline in a climate of unprecedented growth". But it seems the market is still suffering a memory lapse, because Region's shares were down 47 per cent as of July.

On the speculative front, one of the analysts tipped Destra Corporation. He had interviewed the company's CEO, he told us, and had come away with the impression that here was a "very tech-savvy guy". He may well be. But that hasn't helped his company's share price, down 83 per cent year-to-date.

Also among the stock picks from hell were Record Realty (down 89 per cent), Perilya (down 74 per cent), Strathfield (down 50 per cent) and Image Resources (down 55 per cent).

Maybe the analysts' pencils weren't sharp enough. Or maybe they just need to go back to investment school and learn the benefits of diversification.

The fact is successful investing means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries and following market predictions—even ones written by "top analysts".

That's not to say you shouldn't read these articles. But you might be better off treating them more as entertainment, than as information.

1'The Hot Stocks of 2008', The Daily Telegraph, Dec 14, 2007