20/09/2005 - 22:00

Tim Treadgold:Briefcase - The irony of a healthy investment

20/09/2005 - 22:00

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THE experts say that a glass (or two) of wine a day is good for your health. That might be true, but a faster way to improve your financial health is to avoid the wine sector altogether and focus on companies that sell services to Australia’s ageing population.

Over the past year, wine stocks have slipped, sagged and slithered their way ever lower, costing everyone involved very dearly.

Meanwhile, over in the hospitals and pathology sector of the market, there is a boom that is showing no sign of slowing.

Before the good news, a short trip through the wine sector is required to understand just how grim the situation has become, both on the stock market and in the field.

The share price test puts a dollar figure on the problem, but a drive through the South West, such as that taken by Briefcase last week, provides a first-hand view of the physical problem, which is as simple as too many farmers planting too many vines.

Worse than seeing the expansion of grape plantings in the Margaret River district are stories from overseas about a similar stampede into an already overcrowded industry, which is terrific news for drinkers, and bleak news for wine makers.

Capping off last week’s gloom were reports of a first-ever annual profit decline by McGuigan Simeon Wines, and a near $50 million loss by Evans & Tate.

Little wonder that: McGuigan’s share price has slipped from $5.08 a year ago to $4.07; Cockatoo Ridge hit a 12-month share price low during the week of 32.5c; and Evans & Tate limped along at 29c, a 74 per cent decline on the $1.12 the stock was fetching at this time last year when talk of grape glut was being dismissed as nonsense by Frank Tate.

But, if wine is the sick man of the stock exchange, a much healthier picture emerges in a sector that deals with sick people.

Three health care stocks stand out as being among the top performers of the past 12 months. Sonic, Healthscope and Ramsay have all performed superbly, thanks to continued expansion into an industry, which has demand rising strongly for two reasons.

Firstly, there is the ageing population, which requires more medical services. Secondly, there is the appalling failure of governments (state and federal) to provide services demanded by taxpayers.

If it wasn’t so tragic you would have to laugh at the failure of government at both ends of the human services spectrum. Government-run schools are a disaster (discipline is a word that seems to have disappeared), which means young Australians are being short-changed, while at the other end of life the government hospital system has become a bloated bureaucracy that has lost sight of the really important people (in fact the only important people) – doctors, nurses and patients.

Which leaves the way open for private providers – schools at one end and hospitals at the other, which is why Ramsay has risen from $6.20 a year ago to $9.69 today (up 56 per cent), Sonic is up from $9.40 to $15.60 (66 per cent) and Healthscope is up from $3.21 to $6.40 (99 per cent).

Will the health care boom continue? ‘Probably’ is the answer from Briefcase, because people are prepared to pay for the services being offered, and the competition from government gets weaker by the day with the sick and elderly doing (and paying) anything to avoid the government sector.

•••

On the question of value in the market it is worth continuing last week’s theme and noting that the Telstra game has moved out of the political arena and into the marketplace.

So far this has meant that most commentators have simply observed that the Federal Government will have a job on its hands selling its 51 per cent of the telephone company at a decent price. In the humble opinion of Briefcase, this is not the point when it comes to looking at Telstra. It is merely an extension of the political debate, which is over.

Now is the time to look at the numbers, and to ask a few questions, such as whether Sol Trujillo and his associates will be as hard-nosed in dealing with the market as they have been in dealing with the Government.

In other words, will Mr Trujillo now attack the Australian telephony market (and the bloated workforce at Telstra) in the same fearless way he attacked the regulatory environment designed by the Government in its Telstra sales laws?

The answer is yes, with a capital Y.

What you see in Mr Trujillo is precisely what you get. A hard-nosed business dude who will now drive Telstra like it has never been driven before, because it is in his interest to get that share price up.

•••

As a final note on the relative merits of different forms of investment, a cautious stock market player should find the time to hunt down a recent study of the Australian market by the chaps at Goldman Sachs JB Were.

In a very sobering research bulletin on equity portfolio strategy, Goldman points out that (a) the local market is now priced well above most other markets around the world and, (b) that “engineered” investments need to be treated with much greater care than they have been in the past.

On the overall pricing question, Goldman asks this simple question (and we all know the answer). “Resources aside, how many Australian companies can be viewed as global leaders in their field and thus deserve a premium rating?”

On engineered investments, the broker’s view is that a number of these products (such as specialist funds that own assets such as roads, airports, and power stations) are “increasingly based on the opportunistic use of leverage” – in other words, they are wonderful fee generators for the managers, but loaded with debt that could become a millstone if/when interest rates rise.

No recommendations are given by Goldman but the well-reasoned philosophy behind the research note is a wake-up call for investors attracted to these cleverly “engineered” products.

•••

“A thief passes for a gentleman when stealing has made him rich.” Thomas Fuller in 1732 (to which Briefcase adds: does nothing change in this world?).

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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