At the core of Australian Edge are the eight stocks that formed the Portfolio in our debut issue on Sept. 26, 2011. These solid dividend-payers have generated an average total return in US dollar terms of 33.16 percent since inception.

The S&P/Australian Securities Exchange 200 Index is up 25.46 percent over the same timeframe, while the S&P 500 Index is up 24.22 percent and the MSCI World Index is up 19.15 percent.

The average total return for all current AE Portfolio Holdings, on a cumulative basis, including exited positions, is 14.38 percent. The cumulative average for the S&P/ASX 200 is 8.75 percent, the S&P 500 10.30 percent and the MSCI World 7.73 percent.

Our Conservative Holdings have generated an average return of 35.66 percent, the Aggressive Holdings an average loss of 4.96 percent.

If you’re new to AE and investing in Australia, you need to focus on the five Conservative Holdings that were part of the Portfolio on Sept. 26, 2011, specifically AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY), APA Group (ASX: APA, OTC: APAJF), Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) Envestra Ltd (ASX: ENV, OTC: EVSRF) and Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY).

As of this writing, only APA group is trading below our buy-under target. But that’s fantastic place to start, as the stock has come down from a recent high due to concern about what it will take for it to win a bidding war for the assets of Hastings Diversified Utilities Fund (ASX: HDF). APA is yielding 7.5 percent as of the close of trading in Sydney on Aug. 17.

For all other original Conservative Holdings our best advice is to be patient. Use a buy limit order to set your desired price, in other words something below our buy-under target, and wait for the next panic that brings our stocks back to within value range.

BHP Billiton Ltd (ASX: BHP, NYSE: BHP), GrainCorp Ltd (ASX: GNC, OTC: GRCLF) and New Hope Corp Ltd (ASX: NHC, OTC: NHPEF) are the original Aggressive Holdings, though GrainCorp is currently trading well above our buy-under target.

Beyond this plan of action, look to this month’s Sector Spotlights, Aggressive Holding Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY) and new Conservative Holding SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF).

Oil Search has generated a total return of 11.5 percent since we added it to the Portfolio in January 2012, yet it trades below our buy-under target of USD8. It can also be had on the US over-the-counter (OTC) market, where its American Depositary Receipt (ADR) trades. The ADR is worth 10 ordinary shares and is a buy under USD80.

SMS Management & Technology, meanwhile, is what you might call the first graduate from the group of stocks profiled below, “The Decent Dozen” detailed in the table.

This group would have been “The Baker’s Dozen” but for the fact that SMS once again distinguished itself with solid operating results topped off with a dividend increase. The 3 percent payout boost, the company’s first since February 2011, earned SMS another point under the AE Safety Rating System, bringing its total score to a perfect “6.”

Prior to hitting this tipping point SMS was another company we liked a lot but that was just outside looking up at the top 20 that comprised the Portfolio. It was among the “other receiving votes,” to borrow from the terminology used to describe college football and basketball teams that get a lot but not enough voting support from members of the media or coaches to make it into weekly top 25 rankings.

We’ve now expanded the Portfolio to 21, with an ideal up-side of 25. It’s highly likely that those remaining spots–should we opt to fill them–will be filled by one or more of the companies profiled below.

Conservative Choices

Amalgamated Holdings Ltd (ASX: AHD) has more than 1,000 movie screens in Australia, New Zealand and Germany. Although “the movies” has the reputation of a “recession-resistant” industry that dates to the Golden Age of Hollywood in the 1930s and ’40s, this perception is somewhat removed from reality.

It’s true that movie-going represents a cheaper entertainment alternative during times of economic distress, but the most significant factor in box office numbers remains the quality of the product exhibited.

Making movies work as an investment is a matter of smoothing out box office revenue that can be as volatile as any Hollywood diva or director. Amalgamated has complemented its movie business with hotel operations, a mix that establishes it as a global leisure services provider.

It’s also one of the most technically advanced theater operators in the world, as it’s invested heavily in upgrading to 3D and digital capabilities, which promise higher-margin box office.

Amalgamated last raised its dividend in August 2010. Only the absence of a payout increase and a slightly too high payout ratio relative to its sector prevent it from earning a perfect “6” according to the AE Safety Rating System.

It earns two points because of a low overall debt burden relative to total assets and minimal maturities coming due before the end of 2013. It’s never cut its dividend, and its fortunes aren’t tied to commodities prices.

A major drawback is that it isn’t actively traded in the US. Only investors who are able to trade directly on the Australian Securities Exchange (ASX) through their broker are able to readily buy it.

This is the primary reason we’ve held back from adding to the Conservative Holdings, despite the fact that we’ve recommended the stock on three separate occasions, first in the December 2011 issue’s In Focus feature and most recently last month in the same space.

The stock has generated a total return of 30.53 percent in US dollar terms since Dec. 16, 2011, versus 13 percent for the S&P/ASX 200 Index and 17.91 percent for the S&P 500 Index. Amalgamated was also my “Top Pick for 2012” for Steven Halpern’s annual contest.

It’s generated a total return of 25.57 percent for the calendar year through Aug. 17, more than justifying my selection.

Amalgamated will report fiscal 2012 earnings on Aug. 27, at which time we anticipate a final dividend increase along the lines of the August 2010 increase, about 16 percent, or a special dividend similar to the AUD0.04 per share it paid in August 2011.

Amalgamated Holdings, yielding 5.4 percent at current levels, is now a buy up to USD7 on the ASX.

Woolworths Ltd (ASX: WOW, OTC: WOLWF), perhaps the safest Consumer Services name under How They Rate coverage, is the largest retail company in Australia and New Zealand by market capitalization and sales.

It’s also the largest food retailer in Australia and the second-largest in New Zealand. It’s the largest takeaway liquor retailer as well as the largest hotel and poker machine operator Down Under.

All in all it regularly ranks among the top 20 global retailers, with sales that topped AUD55 billion in fiscal 2012.

It’s unrelated to iconic American brand FW Woolworth, the original chain of “five-and-dime” stores but is not related to that bygone retailer.

Woolworths rates a perfect “6” on the AE Safety Rating System. It has a low overall debt burden, and there are no maturities until 2014. It hasn’t cut its dividend ever and in fact hasn’t failed to boost its interim or its final dividend from period to period since it first declared a payout more than 10 years ago.

Based on its track record Woolworths will likely announce another increase to its final dividend for fiscal 2012 when it reveals operating results on Aug. 27. Woolworths rates a buy under USD30.

We added Cochlear Ltd (ASX: COH, OTC: CHEOF, ADR: CHEOY) to How They Rate coverage and recommended it as a buy under USD66 in the April 2012 issue of AE. The stock has posted a total return in US dollar terms of 7.05 percent since Apr. 13, 2012, besting the S&P/ASX 200 Index (2.67 percent) as well as the S&P 500 Index (4.22 percent).

Cochlear offers four distinct product lines providing different solutions for different types of hearing loss. These include cochlear implants, bone conduction implants, implants for electro-acoustic stimulation and implants for direct acoustic stimulation.

Whether these hearing solutions were implanted over 25 years ago or today, Cochlear’s commitment to backward compatibility guarantees that new upgrades and innovations can be offered to Cochlear recipients without further surgery.

Cochlear posted unimpressive headline earnings numbers when it reported fiscal 2012 results Aug. 7 due largely to costs incurred as the result of fall 2011 product recall.

Management initiated the recall of its Nucleus CI500 cochlear implant after “identifying a recent increase in the number of implant failures” due to a loss of “hermeticity.”

An internal investigation revealed that unexpected variations in the manufacturing process left a certain limited number of implants more susceptible to developing microcracks in subsequent manufacturing steps. These microcracks allow water molecules to disrupt and eventually disable the implant’s electronic components.

This recall resulted in a AUD138.8 million pre-tax provision recorded for fiscal 2012. Management is confident that this is the extent of its costs related to this problem. It characterized market-share loss due to the recall of this key product as “minimal.”

Fiscal 2012 sales declined 3 percent to AUD626.7 million, while underlying net profit after tax (NPAT) slid 12 percent to AUD158.1 million. Net profit attributable to shareholders, which takes into account the provision, was down 68 percent to AUD56.8 million. Encouragingly, second-half sales were up 15 percent over first-half totals.

And management also boosted the dividend by 4.2 percent. All told, Cochlear remains well-placed to profit from an aging global population. The stock is a buy under USD68.

Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF) has been even more impressive than Cochlear since the April 2012 In Focus feature “Demographics, Disease and Dividends,” posting a total return of 23.22 percent.

Ramsay is Australia’s largest private hospital owner, and it has operations in the UK and Europe as well. It has 117 hospitals around the world, with around 10,000 beds, and employs approximately 30,000 people. Twenty-two thousand doctors are attached to its service, and Ramsey is approaching 3 million patient days per year.

That positions it well to capitalize on one of the surest trends alive, rising health care costs.

Most impressive about Ramsay is that it’s never failed–never–to boost its interim or its final dividend from one corresponding period to the next. That means a double-digit percentage increase is just about a lead-pipe certainty when Ramsay posts fiscal 2012 results on Aug. 23.

Ramsey reported a 5.7 percent increase in fiscal 2012 first-half revenue and other income from continuing operations to AUD1.972 billion over the prior corresponding period’s AUD1.866 billion.

Core net profit after tax was AUD132 million, up 14 percent from a year ago. Group earnings before interest taxation, depreciation and amortization (EBITDA) was AUD299.8 million, up 10.3 percent from the first half of 2011, while group EBITDA margin improved by 62 basis points to 15.2 percent.

There’s fixed base for a private hospital operator. Each patient has to be cared for according to his or her own diagnosis, which can vary widely and require different nursing capabilities, different feeding and different types and degree of testing.

Management has to be efficient across many different categories to realize what margin improvements can be made. Ramsey has proven its ability to do this over time.

Ramsay Health Care, yielding 2.3 percent but with a consistently growing dividend rate, is now a buy on dips to USD22.

Concerned or angry about Obamacare in the US? Sonic Health Care Ltd (ASX: SHL, OTC: SKHCF, ADR: SKHCY)  management would have you ponder the possible upside, at least for its business, of an additional 30 million patients gaining health insurance and the testing and procedures it avails them.

Sonic is a medical diagnostics company that furnishes pathology and radiology services to doctors, hospitals and other health care providers in the developed world. Also recommended in the April 2012 In Focus, the stock has been less impressive than Ramsay and Cochlear with a total return of 3.95 percent.

Sonic hasn’t cut its distribution in the last five years, it has low overall debt relative to total assets and there’s no commodities exposure. There is the matter of AUD516 million worth of loans maturing at the end of October, the payout ratio is outside the safe range for the Health Care group, and management hasn’t boosted the dividend during the past 12 months.

This latter will likely change when Sonic reports fiscal 2012 results on Aug. 21 and negotiations on its bank loans are reportedly underway.

Sonic guided to full-year earnings before interest, taxation, depreciation and amortization (EBITDA) in constant currency terms of AUD627 million to AUD656 million, which would represent 10 percent to 15 percent growth over the AUD570 million posted for fiscal 2011.

Medicare data suggests pathology volumes increased by 5.4 percent versus the prior corresponding period in fiscal 2012 and that revenue growth should track at about 6.9 percent. It’s yet to be determined whether the entire industry can maintain these types of growth rates, but Sonic continues to win market share from smaller players less able to cope with government attempts to cut costs.

Sonic remains a buy under USD12, though this buy-under target will certainly be adjusted upward should the company boost its dividend in late August.

For-profit education provider Navitas Ltd (ASX: NVT) offers services for students primarily in Australia but also in the UK, Canada, the US, Asia, and Europe. It pathway colleges and managed campuses to students requiring a university education.

Navitas also offers audio, film, and media courses; English-language tutoring; and vocational and job skills training. It also provides recruitment services to students seeking international education experience. The company was founded in 1994.

Although the high Australian dollar and changes to visa requirements caused the market to slump in fiscal 2012, management noted that demand for education in Australia from foreign students is improving.

Navitas reported a 5.5 percent decline in fiscal 2012 NPAT to AUD73.1 million, as overall enrollments declined 3 percent to 14,097, while full-time students dropped 12 percent to 8,577. Revenue for the period was up 7 percent to AUD688.5 million, and earnings before interest, taxation, depreciation and amortization (EBITDA) was up 5 percent to AUD126.8 million.

Earnings per share (EPS) came in at AUD0.195, down 10 percent, while the final dividend was AUD0.101, bringing the full-year dividend to AUD0.195.

Navitas said the 12 months to Jun. 30, 2012 were challenging due to regulatory and policy changes in the UK and Australia that negatively impacted enrollments. The continued high value of the aussie hurt providers of education for foreign students, but the key factor had been tighter visa requirements.

Navitas earns a “4” AE Safety Rating due its consistent dividend history, including increases to the final payout for fiscal 2011 and the interim payout for 2012. It doesn’t earn a “6,” however, because the AUD0.101 final dividend for fiscal 2012 is lower than the final dividend for fiscal 2011, and its payout ratio of 100 percent of full-year 2012 EPS is high.

The difficulty with Navitas, as with Amalgamated Holdings, is that it’s not readily tradable on a US exchange.

The long-term attraction of its education facilities in Australia to foreign students is strong, however, and federal visa requirements are being relaxed. These trends recommend Navitas, which is yielding 4.8 percent at current levels, up to USD4 for investors who trade directly on the Australian Securities Exchange.

Westpac Banking Corp (ASX: WBC, NYSE: WBK) is our second-favorite among Australia’s Big Four banks, behind Conservative Holding Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY).

Westpac’s focused cost-management efforts, peer-leading efficiency ratio and lowest expenses-on-assets ratio recommend it to conservative investors. It’s well positioned with capital and franking credits. And it’s reduced its dependence on wholesale funding markets with solid deposit growth.

During a very volatile period over the course of first six months of 2012, characterized by extreme competition for domestic deposits, Westpac posted cash earnings growth 2 percent to AUD3.2 billion. The first quarter was a softer at AUD1.5 billion due to lower income from financial markets operations, but the second quarter was stronger at AUD1.7 billion.

Core earnings–the metric with which management is most concerned–grew 4 percent. Total revenues were up 3 percent against cost growth of just 1 percent.

Impairment charges grew, but management also noted that “stressed assets” declined by 22 basis points, which is a positive trend for its overall loan portfolio. Westpac’s Tier 1 capital ratio continues to climb, reaching 9.81 percent as of Mar. 30, 2012.

Westpac reduced its twice-annual payout during the worst of the Great Financial Crisis but is already ahead of its pre-crisis rate, having boosted by 12 percent in fiscal 2011. Management also confirmed the AUD0.02 per share interim dividend increase that it announced with final 2011 results. The bank paid AUD0.82 per share on Jul. 2.

The next dividend announcement will come in early November, when Westpac posts final fiscal 2012 numbers. (Westpac’s fiscal year runs from Oct. 1 to Sept. 30.)

Westpac is well positioned to respond in what remains an uncertain environment because of solid operating momentum across all divisions backed by a strong balance sheet. Currently yielding 7.5 percent, Westpac Banking Corp is a buy up to USD22 on the ASX. Westpac’s New York Stock Exchange-listed American Depositary Receipt, which is worth five ordinary shares, is a buy up to USD110.

Aggressive Alternatives

Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY) became the first company to confirm Australia’s shale gas potential with commercial production of the fuel near its Moomba plant in the Cooper Basin in the desert of South Australia, a development it announced along with 2012 first-half results.

Santos revealed Aug. 17 that it had tapped what the Australian government estimates nationally is almost 400 trillion cubic feet of shale gas resources. Santos’s Moomba 191 well was a vertical test well–as opposed to the more expensive horizontal drilling that’s helped overturn the US gas situation–that freed the shale gas by fracking.

Santos reported steady production of 2.6 million cubic feet of gas a day for three weeks, a result that came as a surprise to management. Further development of its shale gas resources could put to bed a few of the questions remaining about whether Santos has enough gas for its Gladstone LNG project.

At the same time, Santos noted that the USD18.5 million Gladstone project could take more than three years to reach full production. The first LNG train at Gladstone will reach full production three to six months after first sales. Timing of the second train is open to question. The company had originally relied on third-party gas supplies to fire up most of its second LNG production train, a situation the shale find could remedy.

In June Santos had announced an increased capital spending estimate for Gladstone, by 16 percent, on plans to drill an additional 300 wells.

Santos’ first-half numbers were solid, as underlying profit rose 20 percent to AUD283 million on higher gas and liquids prices. Santos also maintained its annual production forecast at 51 million barrels to 55 million barrels of oil equivalent.

Santos declared an interim dividend of AUD0.15 per share, unchanged from a year earlier and in line with expectations.

Net income was AUD262 million in the six months ended Jun. 30, down from AUD504 million a year ago. Earnings in the first half of 2011 were boosted by a AUD246 million one-time gain from asset sales.

The company produced 25.4 million barrels of oil equivalent in the six months to Jun. 30, up 11 percent from the previous corresponding period. Sales were AUD1.49 billion, up 27 percent from AUD1.17 billion a year ago. Santos is a buy under USD13.50.

Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY), meanwhile, boosted its annual production guidance due to a strong start for its Pluto LNG project, which turned out first gas last spring.

Once thought to be a trouble spot because of cost blowouts and construction delays, Pluto catalyzed a 43 percent increase in second-quarter oil and gas production to 20.1 million barrels of oil equivalent.

Woodside increased its calendar 2012 annual guidance to 77 million to 83 million barrels of oil equivalent from previous guidance of 73 million to 81 million. Production in 2011 was 64.6 million barrels of oil equivalent.

Revenue for the three months ended Jun. 30 increased was USD1.43 billion, up 14 percent from USD1.25 billion a year ago.

Pluto came online in March at a final cost of AUD14.9 billion, following three costly delays. It produced its first LNG in April and began shipping its first cargos to fuel-hungry Japanese utilities early in May.

Woodside, which will report 2012 first-half results on Aug. 22 and could be lining up a special dividend or an increase to its regular payout, is a buy under USD35.

Down-trending commodity prices, forecasts that Australia’s mining investment boom will end within two years and reports that AUD200 billion of planned resources projects are in doubt are reason for extreme caution when it comes to mining services stocks.

But this negative sentiment might also create a long-term buying opportunity in higher-quality names.

On the other hand, gathering evidence seems to suggest the global economy is stabilizing. Should these trends persist iron ore, coal and copper prices will inevitably improve, in anticipation of stronger Chinese demand, in particular, and dire forecasts about the near-term death of the mining investment boom will be proven hyperbolic.

Before establishing positions, however, you must note that if commodity prices keep falling more planned investments will become uneconomic and will be delayed or abandoned. Earnings visibility for most services companies is murky beyond 2013.

Companies exposed to the best and biggest global resources names are also set to ride out the uncertain environment.

Bigger, better and lower-cost producers have greater scope to maintain projects as commodity prices fall. Cash flows for companies exposed to producing mines or projects well into construction, rather than exploration projects, are more certain.

Ausdrill Ltd (ASX: ASL) offers an integrated mining solution, with its core business being hard rock surface mining services under three- to five-year contracts with long-standing customers. After investing a significant amount of capital the company now has a fleet of over 650 drill rigs, trucks, loaders and excavators and a significant amount of ancillary equipment.

In a recent presentation at an investor conference management noted that a “high level of tendering activity continues” and that Ausdrill is “well placed for continued growth” in fiscal 2013 “and beyond.”

Customers including BHP Billiton Ltd (ASX: BHP, NYSE: BHP), Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUMY), Rio Tinto Ltd (ASX: RIO, NYSE: RIO), Barrick Gold Corp (NYSE: ABX) and Newmont Mining Corp (NYSE: NEM) are among the large and long-standing clients that account for more than two-thirds of Ausdrill’s revenue.

Management raised its final distribution for fiscal 2011 as well as its interim distribution for fiscal 2012 and has never cut the payout, even during the Great Financial Crisis. There are no maturities coming due before the end of 2013, though the debt-to-assets ratio is slightly outside our ideal range at 21 percent. Thus its AE Safety Rating is “4.”

Analysts who cover the stock are also impressed, as 15 rate it a “buy” and one rates it a “hold.” There are zero “sell” recommendations.

The company recently received a letter of intent for a five-year, USD540 million contract award for work at Mali’s Syama gold mine, its largest single deal ever.

During the six months ended Dec. 31, 2011, Ausdrill posted net profit after tax (NPAT) attributable to shareholders of AUD54.6 million, up 50.4 percent from the prior corresponding period. Revenue from operations was up 23 percent to AUD511.7 million, while earnings before interest, taxation, depreciation and amortization (EBITDA) rose 48.8 percent to AUD142.7 million. Earnings per share for the period was up AUD0.1809, while the company paid an interim dividend of AUD0.065 per share, up 18.2 percent.

As is the case with other non-Portfolio favorites, Ausdrill doesn’t trade on a US exchange; this, again, is the primary factor that prevents us from adding the stock to the Aggressive Holdings.

Management will present final fiscal 2012 results Aug. 30. Until then Ausdrill is a buy under USD3.80.

Like Ausdrill MACA Ltd (ASX: MLD) is a solid mining services company with long-term relationships with big-name resource producers around the world. Like Ausdrill, it too lacks a presence on a US equity exchange.

MACA offers contract mining, civil earthworks, crushing and screening and material haulage primarily for iron ore and gold mining companies. The company posted strong fiscal 2012 first-half results, with revenue up 12 percent to AUD141 million, EBITDA up 9 percent to AUD36.1 million and NPAT up 9 percent to AUD16.4 million.

The company debuted on the Australian Securities Exchange on Nov. 3, 2010, and declared its first dividend on Feb. 21, 2011. Although it boosted its interim payout in February 2012, from its original AUD0.03 per share to AUD0.035, the lack of a significant track record prevents us from awarding Safety Rating points for either its increase or its lack of a cut over the preceding five years.

Like Ausdrill its debt-to-equity ratio is outside our comfort zone for Basic Materials stocks, though there are now significant maturities before 2013 and its payout ratio is low. MACA has a Safety Rating of “2,” but this seems sure to go higher in coming years. Analyst opinion on the stock is uniformly bullish, with all seven who cover it rating it a “buy.”

MACA is a buy under USD2.30 for investors who trade directly on the ASX.

We kicked off our look at non-Portfolio favorites with two names from our Consumer Services coverage, Amalgamated Holdings, Australia’s largest movie theater operator, and Woolworths, the biggest retailer Down Under. We’ll close with a riskier play on Australian spending habits.

JB Hi-Fi Ltd (ASX: JBH) sells CDs, DVDs, Blu-ray discs, video games and consumer electronics. It began life as a hi-fi equipment specialist with an emphasis on vinyl. Among the first to recognize the shift to CDs, JB is now fulfilling its legacy of adaptability by integrating a digital presence with its online music streaming outlet JB Hi-Fi NOW.

The company reported record sales of AUD3.13 billion for fiscal 2012, up 5.7 percent over the prior corresponding period. Full-year NPAT of AUD104.6 million was in line with guidance but down 4.1 percent from a year ago. The dividend was also lower by 13 percent at AUD0.65 per share.

Management, however, forecast fiscal 2013 sales of AUD3.30 billion, 5.5 percent higher than the fiscal 2012 figure. Further room for optimism–and this is a “been down so long it looks like up to me” story, as the stock is trading just off a five-year low of AUD7.92 established Jun. 22, 2012–is the fact that JB Hi-Fi’s cost of doing business (CODB) is lower than many of its local and international competitors at just 15 percent.

Amazon’s (NSDQ: AMZN) CODB is 21 percent, while Australian retailers David Jones Ltd (ASX: DJS, ADR: DJNSY) at 29 percent and Myer Holdings Ltd (ASX: MYR, OTC: MYGSF) at 32 percent also pale in comparison.

Low costs position JB to compete well with traditional competitors and to establish a presence online. JB Hi-Fi, which is yielding 8 percent at current levels, is a buy under USD9.75 for aggressive speculators. Like several other non-Portfolio favorites this stock is accessible only for investors who trade directly on the Australian Securities Exchange.