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Rolling the dice with TPG

On Monday this week the Australia 200 index broke out of its four month trading range. In good news for investors it traded up through the ceiling, meaning from a technical point of view further gains are more likely. However the challenge for investors is “what to buy?”.

Simplicity is a virtue in investing. The clearer a principle or proposition, the easier it is to determine its worth. This applies to many investing endeavours, from valuation to portfolio construction and beyond. One of the most straightforward approaches to buying stocks is to start by looking at sectors that are lower.

There are eleven official sectors of the Australian share market. Looking at the last four years, only two are nearer lows than highs, Telecommunication and Energy (Consumer Staples stock are around the midpoint). 

The telco sector is suffering from NBNitis. This is characterised by delayed roll outs, margin pressure and under delivery. Naturally these are real investor concerns, but not everyone will lose from this nationally important infrastructure build.

The sector incumbent, Telstra (TLS), is also the most widely held stock in Australia. Its apparent lack of a growth strategy beyond the NBN roll out makes it in my view the most likely to lose market share, and therefore no bargain at the currently depressed share price. Others in the sector spark more interest.

 TPG’s (TPM) ambitious mobile plans have analysts worried about the required capital commitment and its potential impact on cash flows. The construction of the NBN will also hurt its cable network revenues. On the other hand it has scale in its business but is still more agile than the sector gorilla. This combination of characteristics could make it a winner from the changing telco environment.

Importantly the market has trounced TPM’s share price. Taking a chance on the future was hard to justify at $12 a share. Below $5 per share it’s a much more interesting proposition.

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