Wednesday, April 23, 2008


I realised that about 8% of our net worth is invested in one company: BHP Billiton. This is because we have 35% of net worth in the Colonial First State Geared Share Fund which has 11%+ (at the end of 2007) in this stock - and because the fund is levered, the actual exposure is near double the stated number. Then we also own shares in the CFS Global Resources Fund, which is also invested in BHP, and our other Australian funds undoubtedly also have exposure to BHP given its weight in the Australian stock market. This seems a lot to have in one company, given my guideline to have less than 2% in any individual company stock (except listed funds). You can try to diversify via mutual funds but then end up less diversified than you expect.

Is this a problem? Obviously, a big theme that has done well in recent years is investing in resources. And many would recommend investing in BHP. BHP is very diversified across resources and geographical locations so there is less concern than there might be in most cases in investing in a single company.

But, its price earnings ratio is 17 and free cash flow is only about half earnings. That seems very pricey. According to Yahoo, analysts are not forecasting much earnings growth going forward. That actually seems rather strange to me given the increases in iron ore and coal prices that are underway. So I checked up on Australian analysts' reports through my broker, CommSec.

These numbers are a lot more positive. Australian analysts are forecasting 36% profit growth for the 2008-9 financial year relative to 2007-8 and their forecasts have risen over the last three months. One analyst is forecasting 44% growth. That's reassuring. However, forecasts for the year ending 30th June 2008 are for only 4.6% growth over the previous year.

I guess if i was still worried about investing so much in BHP I could buy put options or short the stock to hedge my exposure. My feeling that that would be a losing trade, tells me that for the moment I am OK with this, I guess.

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