Buy Low, Sell High: The Stocks You Should Buy Today

Update & Strategic Outlook

12 August 2011

Buy Low, Sell High: The Stocks You Should Buy Today

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

- Ludwig Von Mises

What a week. Rioters looted and burned cities in England. The S&P downgraded US debt. And stock markets sold off hard. Here's an extract of what I sent to you last week, just before flying back to Argentina from England:

...here at Bonner & Partners we can relax. We're already positioned for market distress and we can ride through any short term market volatility with no problems.

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In fact we will profit from it. The best thing that could happen to us right now would be a general stock market crash. This would open up a world of new deep value investments, which have been hard to find of late.

Sure, the prices of our existing stock market investments would fall in the short run. But the underlying value of those stocks would be mostly unaffected in most situations, so there would be nothing to worry about. In most instances I'll recommend buying more of our existing stocks if prices fall hard.

Why Q4 Could Get Interesting

Right now feels both like the summer (in the northern hemisphere) of 2007 and 2008. There was a lot of bad news, but stocks were holding up fairly well. Traders were on holiday. The summer sun was lifting spirits, even if the news flow wasn't. (2007 was all about banks reporting sub-prime losses for the first time, 2008 was all about those same losses getting them into deep trouble).

In both years stocks fell hard in the fourth quarter, although 2008 was clearly more extreme. I suspect we'll get a repeat performance this year, as traders and decision makers get back from the beach and winter sets in to sour their moods.

No sooner had this been sent to you when traders' screens turned to a sea of red. S&P downgraded US debt and the crisis in the Eurozone continued with attention turned to France, Italy and Spain.

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This triggered a sharp sell-off in global stocks. Gold surged higher. US Treasury bonds also surged in a "flight to safety", possibly for a lack of liquid alternatives. The dollar moved up and down but has mainly tracked sideways. It's up a little since bottoming on July 26.

Our Diversification Strategy Is Working

But if you've followed our recommendations, then you should have been relaxed. Your stocks will have fallen in price, even if their long term value is relatively unaffected. You have cash waiting on the sidelines to buy value stocks at attractive prices. And your gold has put you ahead overall for the year.

In other words our strategy is working. We have a general idea where the world is heading, but market timing is extremely hard. The stock market plunge came slightly sooner than I thought, but the fact that it happened was expected.

It also shows the need for diversification. We have a large recommended weighting to gold, at 20% of the total family wealth portfolio. Gold has been the star performer this year. At one point it went over $1,800/oz. But it's fallen back to $1,743/oz as I write. Still, that means that gold is up 23.6% this year. In other words, a 20% allocation to gold at the start of 2011 has added 4.7% to total wealth in the space of just over seven months.

Since Bonner & Partners started in September 2009, gold is up 71.3%. So the original 20% allocation has added 14.5% to total wealth in less than two years. That's the kind of performance that many financial advisors and asset managers would be proud of for the entire portfolio. We've made it with just one fifth of our money.

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Where does gold go from here? In the short term I can't say. It could keep powering ahead as the eurozone crisis matures, and if (when) the US comes up with a new money-printing scheme. Or it could fall hard ? maybe 20% to 25% - as things settle down again for a short time.

But even if that happens I think gold has more juice in it before this bull market ends. We could see a situation where the allure of gold draws the general public into a speculative bubble. Or we could get more currency debasement and financial distress over a few years. Either way, gold doesn't feel like it's reached its final destination yet.

If you still own no gold then make it priority to buy some. I suggest a minimum allocation of 10% at these levels, irrespective of whether the price falls in the short term. If you had 20% at the start of this year there is a good chance that you now have a bigger allocation now, as stocks have fallen and gold has risen. But don't sell any of it. Just hold on. We're still far from the crisis end game.

Stocks Are Down ? Here Are Some To Buy

Our cash just became more valuable in relation to stock prices. As expected in falling markets the prices of our stock market investments have fallen as well. But these are just paper losses. You need to remember that stocks represent pieces of real companies with cash earnings and assets. Just because prices have fallen doesn't mean those companies' long term value has changed much, if at all.

Of course, prices could go down even more from here. Or they could start to recover. We don't know in the short run. But in the long run I'm confident that our stock market investments will deliver excellent profits.

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We have six "buy" recommendations in the current portfolio. This means that I think there is still a big margin of safety between the stock price and the (higher) underlying value of the stock.

The prices of some of these have fallen hard in the past couple of weeks. So this is an opportunity to add to existing positions, especially if you haven't bought these stocks yet. I'll briefly go through them one by one.

1. Chaoda Modern Agriculture (Holdings) Ltd. (HK:682) /(PINK:CMGHF). At HK$2.58 this now trades on a P/E of just 1.7 times my estimated 2011 earnings per share (EPS). I said before that this stock was priced for "vegetable Armageddon". It's now priced for, well, something worse than Armageddon. The Chinese will keep eating vegetables. Profits are likely to keep growing strongly. This is about as compelling a value play as you will ever find. But it may take time to play out, so we'll have to be patient.

2. Lippo Mapletree Retail Investment Trust (SIN:D5IU)/ (PINK:LOMRF). LMIRT, an owner of Indonesian retail malls, announced second quarter results on August 4. Building occupancy is 98%, the Indonesian economy continues to grow strongly, and the company still has very low debt levels. At a stock price of SG$0.56 and book-value-per-share (BVPS) of SG$0.85 the price-to-book ratio (P/B) is now 0.66. In other words, there is 52% upside to fair value, at current real estate prices. The dividend yield is now an attractive 7.8%.

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