How our tips played out in 2008

Eoin Gleeson looks back over the last 12 months, and finds there is little pleasant about the performance of the stocks he tipped. But he does manage to find a few rays of hope in a bleak year.

There is nothing pleasant about raking over the performance of stocks tipped this year. If oil sinking from $147 to $45 in three months didn't wipe out your oil stocks, then the year's periodic stockmarket panics probably gutted your small-caps. And if you survived October's global fire sale, you did very well indeed.

Fortunately, none of the firms we tipped on the sector of the week' page this year went bust. But it is still not difficult to find some grim tips. Prize for the worst call this year goes to American nursing homes group Advocat, a supposedly defensive stock. It fell 76% after I tipped it in February. Increasing occupancy and an ageing population weren't enough to convince investors that this tiny operator could weather a recession in America.

Other lousy tips included anything to do with India Bollywood group Eros has dropped 40% and infrastructure group Madhucon Projects plunged 80% since being tipped. Despite my protests that some tech groups had been unfairly written off, it seems the slump in tech stocks hadn't quite gone far enough, with Touchstone now down nearly 70%. But like tech stocks that I tipped last year, such as fraud protection groups Detica and NCipher, which jumped 67% and 140% respectively after being bought out in September, Touchstone too has a good chance of being bought out. In fact, it's already received a number of preliminary approaches, according to regular MoneyWeek tipster Paul Hill.

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My single biggest mistake in 2008 was underestimating how far and fast the price of a barrel of oil would fall. In March, I suggested that Transocean, the deep-sea oil driller, would manage to prosper even as the price of oil dropped. The thinking was that with such a shortage of deep-sea drills available to oil groups and a pressing need to seek out new reserves, Transocean's rigs would be much in demand. As it transpired, the oil groups didn't much feel like venturing to the furthest reaches of the ocean once oil had dropped to $45/barrel. Neither did they feel like employing seismic surveyors such as CGG Veritas to find reserves buried deep below the ocean shelf. That stock has slipped 45% since I tipped it in August. But don't dump Transocean at this stage. Tight credit conditions may put a number of the offshore drilling rigs that were under construction on ice, but the collapse of oil is largely priced into the stock now that it trades on a forward p/e of three. So hold on to it for the long term.

Now for the good calls made this year. The best-performing stock was Wavecom, which has risen 106% after Sierra Wireless weighed in with a €8.50/share offer in November. Wavecom is in the €700bn business of machine-to-machine technology, and stood to post big gains on the back of the EU push to install a black-box safety system in European cars. Then there was railcar manufacturer Trinity Industries, which rose 60% between the time I tipped it in January and recommended taking profits in August. Ener1, producing batteries for electric cars, has managed to avoid the troubles in the US car industry, recording a modest 7.5% gain since September.

Some of the sectors we tipped as safe havens proved just that. Allied Waste (see below) managed to hold its own, rising 7%. Pawnbroker H&T Group slipped 5%, but offers a 3.2% dividend. While telecoms Telefonica and Vodafone fell 25% and 20% respectively, the 4.5% and 5.8% dividends make them worth holding onto.

If there was an easy call to make this year, it was issuing sells on bloated industries. We were right to be worried about how much miners had been ramped up when we recommended taking profits in BHP and Rio Tinto last March. They've fallen 48% and 80% since then, following the recent collapse of their giant merger. It wasn't difficult to recognise in May that the days were numbered for megapub chains such as Punch Taverns it's fallen 89% since we recommended selling up.

So, after a year of devastation, is there any sector left to feel optimistic about heading into another awful year? Well yes, there are three. Nuclear, timber and garbage (see below) all look good to me.

Nuclear: still hot

If there was one sector suffering a hangover even before the year's troubles got started, it was uranium mining. Having raced from $7 to $138 a pound in just six years, uranium had a long way to fall last year. With the price of crude in retreat and the difficulties in the credit market stalling some large nuclear projects, uranium fell almost 50% again this year to $53 a pound. In short, the long-awaited nuclear renaissance again failed to materialise.

But it can't be far off. EDF's move for British Energy brings it one big step closer. And with 35 nuclear reactors under construction from Russia to Indonesia, there's plenty of underlying demand for the metal. According to current projections, 630 reactors will be operating in 55 countries by 2030, says the International Atomic Energy Agency. That will nearly double the world's appetite for uranium by 2030 to between 94,000 and 122,000 tonnes. But even with only 440 existing reactors using 77,000 tons of uranium a year, uranium miners have only been able to satisfy two-thirds of the demand. The shortfall has usually been made up by sourcing recycled uranium from old Soviet warheads America, for example, relies on Russia for 50% of its uranium. But as we noted in May, those stockpiles are rapidly depleting, with nuclear shipments from Russia set to fall by around half by 2013.

That's why we recommended buying Cameco (NYSE:CCJ) and Uranium Participation Corporation (TSX:U). Cameco, which accounts for around 20% of world uranium production, has fallen with the price of uranium this year and is now down 55% since I tipped it in May. On a forward p/e of 11, an already cheap play on the recovery in uranium prices is now even cheaper. As we noted in May, the simplest way to play uranium is to buy the metal itself. Uranium Participation Corporation buys uranium direct and stores it at power plants. It has fallen 22% since we tipped it, but will rise again with the metal price.

Timber: well placed for growth

As we noted in last week's cover story, as an asset timber has qualities like no other rising in three out of four major periods of market anxiety in the last century, according to GMO fund manager Jeremy Grantham. While lumber consumption in America is expected to fall 15% this year, forest owners can just leave the trees to grow and accrue value. Unlike their cohorts in the timber industry from wood processors to paper-mill operators who are struggling with heavy debt and labour costs, forest owners won't have to bust a gut to keep themselves afloat.

Soil, sunlight, air and water all the key ingredients are largely provided by Mother Nature. And as we noted last week, one of the UK-listed funds such as the Phaunos Timber fund (LSE:PTF), with $2.5bn in the pipeline for investing in forestry from China, America to Latin America, is a good pure play on timber.

In June, the focus was on China's timber industry. Having until recently relied on Russia for cheap logs, Putin's decision to lift the tax rate on log exports to 80% has prompted Beijing to foster its own forestry industry. That's why Sino-forest (TSX:TRE) looked a sound bet. It's dropped 42% since we tipped it, having been caught in the October sell off. But sitting on 312,000 hectares of timberland across China, with little debt on its book, it's an attractive play on a p/e of 5.8 times.

Waste: a recession-proof investment

Only one sector turned out to be truly recession proof. That's because, for the big players in the $52bn US waste industry, the main source of value hasn't been damaged. Making money in the garbage business these days is about owning landfill space. As the industry was privatised in the 1980s, the big waste groups bought up huge tracts of land in the US Midwest. Americans dump 200 million tons of solid waste every year. These firms can command between $20 and $40 per ton of trash unloaded at these landfills.

Our garbage tip, Allied Waste (rising 7% since we tipped it in January) was already a big player but not big enough to avoid being bought out by Republic Services. The merger will create the second-largest waste-hauler in America, with 219 landfills and $9.3bn in annual revenue. The deal will save the combined group at least $150m a year, say Morningstar analysts, driven mainly by job cuts, office closures and lower fuel bills.

Allied will also inherit exclusive regional contracts in areas such as Las Vegas, Los Angeles and parts of Florida and Texas, representing roughly 40% of Republic's revenue. There's scope for raising prices and with some long-term contracts spanning almost 30 years, revenues are predictable. Aside from Waste Management, there are no big groups competing with Republic Services's landfill space. It trades on a forward p/e of ten and offers a 3.2% dividend.

Water: bail out now

As well as not anticipating the drop in oil prices, another error was assuming the scale of disaster facing China's water supply would provide support for water stocks. A brief reminder about China's water story. More than 28% of its water supply has been destroyed by industrial waste with millions of people cut off from water as algae chokes the lakes and rivers. But the Chinese are doing something about it, setting out a five-year plan that requires 70% of Chinese cities to treat their wastewater by 2010. The plan is estimated to cost $125bn in total.

So the Chinese have been farming out projects to water treatment groups in Singapore, which has the world's most advanced water management industry. Unfortunately, despite announcing a slew of new projects in China last year, the stock we tipped, Bio-treat (down 70%), has run into financing problems. A bad earnings announcement in August saw the stock fall 40%. Bond holders have become impatient with the firm and the scale of its ambitions, and are now issuing default notices. Bio-treat is spinning off its Chinese water business to raise the money to pay back bond holders. But when a firm loses credibility, it's best to sell. Similarly, Israel's Amiad Filtration is being hurt by fears that industrial and agricultural investment in water treatment will slacken next year. Amiad had a strong year until recently, rising 50% by September. It's now down 22% since we tipped it and offers a 4.6% dividend yield. Cut your losses.

Eoin came to Money Week in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.

Eoin acts as managing editor of MoneyWeek's newsletters.