Dear Reader,

The investment world is chock full of advice. We benefit from the pearls of wisdom scattered liberally through modern investment literature by gurus the likes of Buffett, Graham, Lynch and Soros PLUS the daily diatribe of dozens of financial journalists and analysts. Given the abundance of advice we should all be billionaires! But it’s not to be...

You see investment advice should come with some form of disclaimer. The main problem I encounter is the contradictory nature of the advice given. Ask a room of 10 equity analysts for their view on MTN Group, for example, and you’ll get a smattering of “buy”, “sell” and “hold” calls. Who do you believe? Which market commentator should you follow?

A similar situation develops when you try to adhere to so-called market lore. My favourite among these is “don’t invest with the herd – you’ll get trampled!” It sounds simple enough… Don’t rush into the markets when everyone else is rushing in, and vice versa. But when there are so many investors the “herd” is often moving in both directions. Even if you’re not “running” you end up as part of the herd doing nothing, as it were. Besides, in my view you can just as easily be trampled running with the herd as running against it! 

The Investor’s Digest however helps to make sense of this market irrationality out there with a completely logical system built on the premise of some of the greatest investors strategies and to the exclusion of all emotion.  In fact, in the last 6 months while the All Share Index delivered a measly 7.7%. This system’s Grand Master Portfolio has delivered its investors just over 17% in exactly the same period. You can learn more about this phenomenal system here.

So I got to thinking about the abundance of investment advice while reading an I-Net Bridge article titled Construction confidence takes a knock. They report that the First National Bank /Bureau of Economic Research civil construction confidence index fell from 27 points in the fourth quarter of 2010 to just 21 points in Q1 2011 – the lowest level in 11 years.

My best guess – looking at the bombed out construction shares – is the herd has long-since departed the construction sector pastures… The big question is when to leave this herd of contented investors who sought refuge in non-construction stocks to begin the journey home?

And when we decide to venture back into the troubled construction sector, which of the damaged vessels should we favour?

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Timing the market is a mug’s game!

Let’s step back a moment and consider the 21-point civil construction confidence result. What this score means is only one in five civil contractors believe prevailing business conditions are satisfactory. And that’s not great odds coming from experts immersed in the country’s heavy construction industry.

First National Bank reckons there has been some improvement in public sector contracts thanks to provincial government expenditure BUT warns that private sector expenditure (including housing projects and mining infrastructure) have all but ground to a halt. “Notwithstanding the likely bottoming out of construction activity, conditions remained extremely tough and unsatisfactory in the civil construction sector,” says FNB economist Cees Bruggemans, hammering the final nail in the sector coffin.

He says competitors are so busy fighting each other for the work on offer that they risk eroding their profits. To make matters worse, the smaller companies who cannot secure work are incurring additional non-operational costs such as those for retrenchments and other restructurings.

I applied my mind to the construction sector late last year. At the time I suggested the earliest sensible return to construction shares would be in 12 to 18 months time – Q4 2011 at the very earliest. But recent price action at the likes of Murray & Roberts (JSE: MUR) suggested the shares had hit rock bottom and were ready to begin their upward journey.

The argument goes something like this: “The sector is bombed out – and there’s now way it can fall any lower – so long-term investors may as well buy now when its dirt cheap!” Murray & Roberts has certainly responded to this logic, up around 10% since its 2011 low.

But should we be diving into a sector given the terrible prospects over the next 12, 18 or even 24 months?

Is it safe to “jump the gun” in the construction share race?

The above is a very difficult question to answer. I think early birds in the construction sector will be generously rewarded; but they may have to wait quit some time… So the tactic here really depends on your investment outlook.

If you are a short-term speculator looking for quick profit opportunities then I think you’ll want to give the construction sector a wide berth for now. If you have a longer-term view (and I’m talking of at least three years) then you might consider a “punt” on the likes of Murray & Roberts or Group Five (JSE: GRF). Down and out they may be – but they’re still top class construction picks. I don’t have a favourite as either of the two should perform to plan over the next three years.

Murray & Roberts boasts an R50bn-strong order book, while Group Five has confirmed orders worth R9.3bn. Both companies are sitting on piles of cash and should easily meet the Profile Media consensus for forward dividends in FY2011 and FY2012. Murray & Roberts is pencilled in for a dividend yield of 4.03% this year and 4.63% next, while Group Five should achieve 3.88% and 4.05% respectively.

This “strategy” comes with a disclaimer. Your capital return over the first year or so will not be spectacular. Capital gains will depend on the construction sector turning around! But the dividends on offer are better than cash in the bank – and there’s always a chance of a special dividend if these companies fail to find an outlet for their capital!

I’ll be back with another MoneyMorning instalment on 21 April 2011.

Until then, let the profits roll,

Gareth Stokes

PS.  “Your Once in a Lifetime Opportunity to Learn the Secret of Trading for Huge Profits – whether the markets are Up or Down!”