In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business. Wesfarmers (WES) – $43.80 – Last week Wesfarmer’s announced its intention to demerge its biggest division Coles. The demerger will create an ASX top 30 company with leading positions in grocery, liquor & convenience. Here are the dot points: Shareholders would have the opportunity to vote on the demerger. Wesfarmers would retain a <20% in Coles & a substantial ownership stake in flybuys. Shareholders would receive new shares in Coles proportional to their existing shareholding. Distribution of Coles shares expected to qualify for demerger tax relief, subject to ATO ruling. Subject to final Board approval, third party consents, regulatory & shareholder approvals. If approved, the demerger is expected to be completed in FY19. Broker View:  So far there are no broker reports yet. The announcement came out on Friday 16 March. Unconventional View:   This demerger is, what some are calling, a no brainer for Wesfarmers. The performance of Coles has been underwhelming for the past 5 years with lower than expected returns on capital, lacklustre profit and dismal sales numbers. The business is basically stagnating and slowly fading away into the abyss. Competition has became aggressive with entrants such as Woolworths, Aldi, Costco, Metcash IGA, Amazon and now Lidl and Kaufland all fighting for a stake in the grocery space. It’s raised the bar. In the $90bn grocery space, Aldi has pinched a 13.2% stake compared to IGA’s 9.3%. Coles’ market share has fallen for the first time in years to 30.9% while Woolworths’ has a 36.8% share 2017-18, remaining the largest Australian supermarket company. It’s disappointing news for Coles and something drastic needed to be done, fast. Coles was losing ground for a few reasons. Wesfarmers is a conglomerate that has its hands in everything and is simply doing too much. This is a major handicap. Its pure size makes it tough for management to focus solely on Coles and too much of its capital was being misallocated to Coles. Coles accounts for 60% of WES’s capital allocation yet it only contributes 34% of total earnings. That means WES is wasting money on Coles which isn’t working. After a strategic review, CEO Rob Scott decided it was time to make a change. We think the demerger is a game changer. Not only for Coles but for Wesfarmers. For this article, we will focus solely on Wesfarmers. By offloading Coles the results are pretty obvious. A simplified and easier to manage Wesfarmers that now has a higher allocation of capital to improve returns. Dead money which had been tied up in the low growth grocery sector with Coles can now be appropriately allocated to other higher growth parts of the business to improve returns. Without this demerger, WES will always be stuck in a stagnanting low growth arena. Simply look at the stock chart over the past ten years, it’s gone nowhere. Now Wesfarmers is unshackled and can produce superior growth rates. Coles on its own will also have its own merits being a company with one directive. The standalone company will be worth about $20bn and will be better able to compete on its own. Coles will be more attractive outside Wesfarmers than within it. So is Wesfarmers a Buy? We think so. The company has unshackled itself and can now target a higher capital weighting toward businesses with strong earnings growth prospects. Its businesses are Bunnings, Industrials, Kmart, Target and Officeworks. After this demerger it’s all about Bunnings. The business alone will account for 50% of Wesfarmers earnings. But there are still a few headwinds that need to be ironed out such as the decision on the future of its struggling Bunnings UK operation and Target. Once that’s done, Bunnings will remain the growth vehicle of the company. In comparison, Coles is a mature business in a competitive industry. Kmart is doing very well, Officeworks is robust…

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