Punting On A Swim Against The Stream
Sun Herald
Sunday January 18, 2004
WITH the dollar possibly running out of steam, or more correctly, the US dollar showing some sign of stabilising its falls, and commodity prices still red hot, there are going to be a number of broker analysts seriously upgrading their resources earnings numbers.
Having completed our effective exit from the mainstream resources of BHP Billiton (above $12) and Rio Tinto (mostly over $38) we must now wait and see whether this counter intuitive approach works out.
Almost everyone is saying that the big certainty is to be well exposed to resource stocks so it's interesting that so far taking the opposite tack in the face of all this demand seems to be working.
I was happy to buy BHP at less than $9 and sell it for more than $12. I may leave some on the table if the stock rebounds during February but, in my experience, November to January is the time to hold big resource stocks, although it's been some years, possibly even some decades, since it's worked to such perfection as on this occasion.
For our clients who have owned BHP for years, and we seek to add value to their holding by writing options over the shares when it seems appropriate, we bought a February $11.50 put with some of the proceeds raised by selling a February $12 call . So we make money for these clients as BHP shares fall and particularly if they fall towards $10.50 as I am hoping.
PAPERLINX fell below $4.50 last week. You may recall I bought them below $4.50 last year and wrote in favour of taking profits above $5.50. Now it has downgraded its short-term earnings in the wake of the dollar's rise and the shares are back to $4.50 again so I've put them back into the portfolio as a little sleeper.
To pay for them, I sold Brambles , which we also bought via options at less than $4.50 but ran up over $5.40 last week. There was some ill-informed comment that it might be going back into the London share index, and more believable rumours of a break-up adding value. I think the hedge and active funds are positioning for a more upbeat result following favourable visits in Europe and the US.
I'm happy to have another look if it falls below $5 again. We've traded this range at least three times. In the past, I've tended to sell $5.50 calls but the premiums are too low at the moment to justify this path.
AT the risk of upsetting my offsider who is away, I also took profits on Nylex , which we quite like as a recovery play but was a small position via a discounted placement. I was intending to add to them but the stock ran away to 36 cents so it was easier to sell what we had rather than buy some more.
I'M kicking myself for forgetting to put Hardman Resources (HDR ) in the battle of the share tipsters. You may remember a bungle over one of my stocks in the June round. I intended to include HDR but, as luck would have it, I ended up with HRD (HarvestRoad ), which ran from 7 cents to about 15 cents incidentally HarvestRoad is now above 45 cents!
Hardman was recently involved in another major oil discovery on a step-out well leading even the most conservative of operators, Woodside Petroleum , to grudgingly concede it is now a commercial field. Woodside has played down the potential, but the bullish estimates make your eyes pop out and have Hardman running for some time yet.
The constant fear overhanging the share price is of yet another placement, to fund yet more exploration. What probably caused the run in the past few days was the news it increased its exposure to the project before the discovery. It may be it can largely avoid further dilution. It also reacted on Friday to an ASX response saying the company knew of no takeover approaches, but thought it might be delayed reaction to the discovery.
This suggests that the price last week may have been influenced by takeover speculation from Britain. Hardman is quite well followed in Britain as I discovered on my trip there last month. It would have to be high on my list of takeover prospects for 2004.
Since Woodside left Hardman standing at the altar, a bid from a British oil company is likely.
© 2004 Sun Herald