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• Key ASX stocks following reporting season

• Santos versus Woodside Petroleum

• Contrarian's view on Newcrest Mining

This week…

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This week we look at the following topics:• Key ASX stocks following reporting season• Santos versus Woodside Petroleum• Contrarian's view on Newcrest Mining

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Over the first two weeks of September we will be highlighting the top 30 companies listed on the ASX and providing a brief analysis of how we think their results have been. We covered the first 15 stocks last week and this week we will touch on the next 15 to round out the top 30. We feel that it is important to spend time going through each company individually, a lot can be overlooked during reporting season when results are all dropped in one large heap on investors. Our criteria will look at the company, the result and more importantly our investment conviction following the numbers. This will be the third column in the report, as we have done previously in our Invast Insights reports. The September series of reports will be comprehensive enough to give you a good footing for moving forward in October.

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It’s going to take a long time for QBE to win back market trust. The result was disappointing with plenty of excuses tabled to shareholders from management. At the end of the day QBE is starting to fight with global investors who have access to very cheap money and thus are willing to demand a lower return on investment. This drives down the investment returns QWBE was used to having in its reinsurance business. The glory days are over.

There might be some short term turnaround given so much bad news has been taken through the stock in recent years, but is that a good enough reason to buy the company? Probably not, just because bad news is ending that doesn’t make the situation any better. For us QBE remains an avoid, the numbers, yield, multiple etc don’t really mean much because a total year’s earnings base can be completely wiped out by a one off event or something that an individual investor knows very little about. Past history has shown this can occur.

Stay away and don’t be tempted by the valuation.

QBE Insurance (QBE) Result: Interim US$392m

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Transurban continues to surprise the market by the growth in its underlying infrastructure assets. It’s not the most exciting business but it doesn’t need to be nor does it pretend to be. The business is effectively a great inflation hedge, as cheap money floods the financial system and drives up inflation, Transurban’s assets will increase in value and the income from those assets have inflation hedges in place to ensure a smooth transition. The largest threat to this business is that at some stage in the cycle, management might be tempted to take on-board too much debt and do something silly. Nothing yet in that order, but who knows.

At a 30x price to earnings ratio of next year’s earnings, we see little value and plenty of downside if things don’t go according to plan.

Transurban Group (TCL) Result: $252.2m

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In stark contrast to QBE, this was actually a fairly straight forward and good report card. One of the things we like about IAG is the fact that they have taken the hard decision of cutting their losses in the UK and moving on into Asia and Australia where they have core markets. This has been the primary driver behind the share price rally.

IAG will continue to benefit from this differentiation and clear distinct strategy. Exposure into Asia will start to yield benefits over the next few years. The only issue for us is price, because the stock has run up so hard we would be inclined to sit on the sideline and wait for a 10-20% pullback before relaxing our assumptions.

We might not see the stock in the mid to high $5 range for a while, but we don’t see a point of chasing it either. As QBE has shown, insurance businesses are poised to eventually disappoint and chasing makes this a risky proposition.

Insurance Aust. Group (IAG) Result: $1.23bn

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This is our preferred Westfield vehicle. We think the separation was desperately needed and Westfield Corp is now a high growth property development, management and income vehicle which is leveraged to growth in economies where the cost of capital is very low.

The separation of lower growth but high quality properties now means that Westfield corp can focus on high growth opportunities – particularly in joint venture developments – without the capital constraints. The Westfield brand has a long history of management performance, a well-defined strategy and focus on capital returns.

We liked the result and continue to back this stock as a core holding in a very well diversified portfolio.

Westfield Corp (WFD) Result: -US$871 (pre adjustments)

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We don’t really have a strong view on the stock at the moment and think it is trading within a narrow band range as the business consolidates and the global economy improves. The macro themes are important for Brambles but they are not the only issues that matter.

There is a strong interest among the market of Brambles ability to maintain its competitive advantages and stave off competition. If it can manage to do this and reinvent itself, there will be large upside. But if vulnerabilities come back and bite the business despite recently clean results, it will be a matter of back to the future.

A hold at best for now. Let’s wait and see.

Brambles (BXB) Result: $1.34bn

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Our preference in the energy space is Woodside Petroleum, we have made no secret about this. Santos’ result was well received by the market and we do see some real upside opportunity here, it just comes down to risk tolerance.

The actual production numbers were slightly disappointing for us, but that might be because we have a very high standard with our Woodside preference. We have probably relaxed our views slightly since the result but still not willing to call this a buy. Readers of Invast Insight would have read last month our very bullish view on the energy space, this stock will be a beneficiary if oil prices head higher over the next few years.

Santos (STO) Result: Interim $258m

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We think this is an Avoid, regardless of where the numbers end up. We have been following this business for many years and one of the most obvious issues for us is the constant one-off and abnormal charges that are taken through the profit and loss statement. This distorts the investment metrics. Amcor has some strong competitive advantages, we don’t dispute that. What we do dispute is the investment metrics, the high debt and the commoditised nature of the industry. Not good enough for us to bother.

Amcor (AMC) Result: $737m

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Oil Search is playing a high stakes game with its offshore expansion. As we have said above, our preference in the energy space is Woodside Petroleum, we have made no secret about this. We couldn’t really find anything in Oil Search’s numbers to change our view. Its not a stock that we can sleep comfortably at night owning because of possible sovereign risk ramifications and the high capital cost that has gone into recent project developments.

Unlike Santos, we haven’t relaxed our views slightly since the result. Readers of Invast Insight would have read last month our very bullish view on the energy space, this stock will be a beneficiary if oil prices head higher over the next few years but execution risk is high at this stage of the cycle for this business.

Oil Search (OSH) Result: Interim US$152m

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Poor result and more excuses. There are too many factors outside the control of this business. Industrial issues, commodity prices, geography, government changes etc. All this on a very capital intensive business structure.

Most of the bulls on the stock point to Warren Buffett being invested in railroads oversees to which we argue that those are not as heavily reliant on commodities like coal and iron ore. We don’t think Buffett would buy a rail and haulage business like Aurizon.

Aurizon Holdings (AZJ) Result: Underlying $523m

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Like our comments on Transurban, Sydney Airport is very well placed to benefit from rising inflation and the financial impact this has on asset prices. Outside of this, the investment case is fairly straight forward. The most interesting decision for the company will be whether or not to use its right to develop Sydney’s proposed second airport at Badgery’s Creek. The market will view that decision as crucial and we don’t have a view on how that will go.

Because of this, we don’t see any compelling reason to be in the stock as of this point in time.

Sydney Airport (SYD) Result: Interim $53.9m

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Stockland is a major beneficiary of the real estate investment boom currently taking place along the east coast of Australia. The residential development division is just one of the business pillars and there are still other areas like retail and industrial which Stockland is exposed to, but as interest rates remain low and the RBA continues to see a need to stimulate through building and investment, it’s hard to shy away from stocks like this.

The only issue becomes valuation and pricing as opposed to cyclical trend. Starts to look attractive in the low $4 per share range which might eventuate on a market pullback.

Stockland (SGP) Result: Underlying $555m

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AGK is a perfect example of why we think Oil Search isn’t worth the risk to reward ratio. The stock had been bid up fairly strongly into the result and an ordinary and lacklustre set of numbers was enough to see the market punish it towards a base of stability.

We much rather prefer industrial businesses like Woolworths and Telstra who not only provide stable dividends but equally important capital upside as they are leveraged to real economic inflation.

AGL Energy (AGK) Result: Underlying $562m

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Like our comments on Stockland, Goodman is very well placed to benefit from low interest rates and a focus on building. The industrial portfolio is different to many listed peers and Goodman has always traded at a premium because of its strong ability to generate strong development returns. It’s hard to fault the stock and it probably deserves a place in a very well diversified portfolio with an undemanding price to earnings ratio of 15x next year’s earnings. This translates to an earnings yield of around 6.7% with inflation growth as opposed to the RBA cash rate of 2.5%.

Goodman Group (GMG) Result: $601m

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Newcrest has taken a lot of the hard pain required over the past few years and is now in a consolidation phase. The earnings and share price profile are now completely leveraged to the gold price and so an investment view here is based on where an investor thinks the gold price will go.

The stock is trading near 10 year lows and while there are few very reasons to be bullish on gold at the moment given price movements, a contrarian investor could see this as an opportunity to hold for the long term as part of a very well diversified portfolio. We wouldn’t argue with that, as long as the time frame is not an issue.

Newcrest Mining (NCM) Result: Underlying $432m

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At some point in the next couple of years the commodities cycle will turn and Orica will again find itself as a beneficiary. We don’t know when this will occur, it could take a while. This might be one of the primary motivations for separating the chemicals division from the rest of the business. We think if this is executive successfully and a reasonable turnaround in sentiment towards the mining and resources space, there might be some good upside in the stock over the next two years. There are two big variables here which need to be monitored, we will update in the next few months and explain in more detail in our webinar at the end of this month.

Orica (ORI) Result: Interim $263m

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Next week we will review a collection of smaller companies which we found interesting during reporting season. These are generally smaller and sometimes more volatile businesses but we will be screening those which we think can become larger businesses and with decent balance sheets to facilitate this.

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Stocks outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the September outlook guide for the Australian stock market in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Performance of key blue-chip companiesPerformance of emerging smaller companiesOutlook for the ASX200 indexPortfolio management tips and tricks

Peter’s webinar will cover both the fundamental and technical outlook going forward plus the key drivers to look out for and is expected to fill fast. Q&A will be open straight after the webinar. Register now by visiting http://www.invast.com.au/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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