Blind theory impedes reality

By Peter V O'Brien

Thursday 8th April 2004

Share price movements in the three months ended March 31 confirmed the widely held view that it is superficial and misleading to refer to "the market" as a global entity.

The table lists the 10 highest performers and the 10 lowest since the end of 2003. It excludes stocks priced at less than 20c on December 31 and miners. It shows a market comprises many stocks with wide variations in their capital returns in any given period.

Those who prefer blind theory to reality are the only people who could see commonality in price fluctuations between Mooring Systems' 103.2% capital gain in the past three months and GDC Communications' 37.5% decline.

Neither company has produced a net profit since listing, but that did not deter investors from judging the organisations' market status. Companies whose operations have yet to be proved may be considered a poor guide to overall price performance, so we can look at market performance discrepancies between those that had a history of established business and profitability. Broadway Industries and Air New Zealand were in that category.

It was immaterial that they were vastly different in size and operated in totally unrelated industries, because both companies were part of some presumed organism known as the "market." Broadway's share price went up 33.3% in three months, while Air New Zealand's declined 17%, a combined "gap" of 50.3%.

Concentration on market leaders and indices has become a soft option for people commenting on the sharemarket, including sections of the media.

The heavyweights dominate the indices and fund managers' portfolios, which are weighed to indices and to their use as benchmarks. No serious private investor should adopt such slavish behaviour. The NZSE40 capital index (the now removed measure of capital price changes) went from 2278.33 on December 31 to 2321.63 on March 31, a 1.9% gain. Even the NZSX50 gross index improved only 5.8%.

That index includes dividends, for which no allowance was made when calculating percentage movements for the table. The results were ironic, given the inclusion of New Zealand Exchange (NZX) as the second-highest performer on a straight capital gain basis, without the puffery of gross returns. Telecom's performance as the heaviest of the heavies was well behind the 10 highest, with a three-months' gain of 8.4%, ranking it 27 in terms of positive performers. That might be a surprise to people obsessed with the company's 1c or 2c daily price movements.

Investor assessments of each of the highest 10 price performers were sound. Mooring Systems' revolutionary system for mooring ships has obtained contracts in the UK, Europe and Australia and a "conceptual research" contract with the US navy.

The company's submission to the US Navy focused on the "provision of conceptual research and a physical demonstration of ship-to-ship ... mooring systems and associated equipment for the US Navy office of Naval Research".

Mooring Systems seems close to breaking through to operational profitability.

Vodka producer 42 Below benefited from an agreement with Foster's Brewing International to market products in Australian and Pacific duty-free outlets. The company also extended its sales operations in the US.

Eftpos specialist Provenco continued its strong piece improvement, which became apparent in calendar 2003 when there was an 83.3% gain. Profit was $2 million in the six months ended December 31, compared with a $177,000 deficit in the corresponding period of the previous year. Provenco forecast pre-tax profit of $4.8-5.2 million for the full year.

Broadway's 33.3% price-increase followed last year's 84.2% jump as the manufacturer moved back to solid profitability.

Tenon (formerly Fletcher Challenge Forests) achieved most of its lift after sale of its forests and obtaining approval to return capital to shareholders.

Trans Tasman Properties received an offer from majority shareholder Sea Holdings for the shares not already owned. The offer of 40c a share was criticised as too low, so more could be heard about the proposal.

Tower was a recovery situation, as noted in The National Business Review last week.

Carter Holt Harvey's price improved in line with the company's sale of its tissue business for $1 billion, a proposed share buyback of at least $450 million and an improved outlook for the remaining businesses.

Mowbray Collectables' 16.9% price appreciation in the quarter was apparently the result of a $171,000 profit in the six months ended September 30, solid trading in stamp, coin and book auctions since then and an alliance with Auckland's Peter Webb Galleries.

The next three months, or the six months from December 2003, could see changes to the list of high performers, but shareholders in the current 10 have no reason to lament any future changes.

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