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Portfolio for the cautiously optimistic

WITH the general optimism greeting equity investors this calendar year, it is an opportune time to speculate on a model portfolio of stocks for 2002.

The “powers that be” at Business News have placed rather specific restrictions on stocks to select from, with a Western Australian base being the most important characteristic. Therefore, it is this correspondent’s duty to advise on a model portfolio of WA companies with a hypothetical $100,000 investment.

With most pundits cautiously optimistic on the sharemarket in 2002, I have decided to bias my portfolio towards growth. In doing so, I have selected companies that have inherent risk associated with them, but also offer the serious investor good capital appreciation prospects.

The mix of stocks also includes companies that pay fully franked dividends, a must for any stockmarket portfolio. The income portion of the portfolio includes Wesfarmers Limited, Woodside Petroleum and Foodland Associated Ltd. Wesfarmers and Woodside are the two beacons of the Western Australian public company fraternity.

Wesfarmers offers the discerning investor income distribution with the added attraction of further capital growth. The group operates very successfully within five core divisions, and growth is expected to remain well above average over the next few years. The recent acquisition of Howard Smith will provide synergy with Bunnings, the expansion of the coal operations and positive growth in energy and rural should offset any reduction from fertilisers and chemicals.

Woodside offers the best equity returns of any Australian resource stock historically, and this trend is expected to continue once the fourth NorthWest Shelf LNG train is up and running.

The stock offers a price/earnings ratio of 12.4 times at the current share price of $13.40, which compares favourably with our price target of $16.50 per share. The prohibition of Shell’s takeover has resulted in Woodside returning close to its premium rating, although its share price remains well below historical “fair value”.

Foodland Associated is a stock that promises a great deal for 2002, with the recent acquisition of some Franklins stores in Queensland and NSW expected to add significantly to its earnings. Also, Foodland’s Progressive has aspirations to buy Woolworths NZ, which could also greatly affect future earnings.

The current share price of $12.40 equates to a price earnings multiple of 13.4 times, which compares favourably with Woolworths, which is currently trading at a multiple of 22.7 times. This shows the current discrepancy in the two share prices, and represents greater growth possible in the Foodland share price. The current dividend yield of Foodlands is 6 per cent net and helps the income aspect of this portfolio

Futuris Corporation is the more risk-oriented inclusion in this portfolio, with an overweight position of 20 per cent of the portfolio. This company is currently trading on a price earnings multiple of 13.3 times, which also prices the company with a lot further upside. The dividend yield is a low 4.3 per cent net, but the company offers the more adventurous investor plenty of excitement over the next twelve months.

Burswood Limited is an inclusion that should benefit from its recent expansion. The company has a current P/E of 9.8 times, and a dividend yield of 6.4 per cent net. The company is reasonably priced at 80 cents per share.

Two speculative inclusions in this portfolio are Dolomatrix International and Hill 50 Gold. Both of these companies are special inclusions based on an optimistic 2002. Dolomatrix has been mentioned previously in this column, and is expected to have a very good year. It has recently announced a contract win for the treatment of arsenic waste, which is long term and validates the technology of this company.

Hill 50 Gold is the gold inclusion in this portfolio, a metal that has been conspicuous by its absence recently in portfolios. However, with the current rationalisation in the industry expected to continue I believe that Hill 50 will be included in this.

Disclaimer: Peter Hayes may have an interest in any of the stocks mentioned above.

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