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Telstra, the share market’s white elephant

Australia’s fascination with Telstra has continued despite the news that the company may not be involved in the National Broadband Network being proposed by the government. People love to own this stock yet for the life of me I cannot understand why.

Telstra floated in November 1997, and while the stock rose over the first 15 months, it has been in a downward spiral since February 1999. In fact, during the 137 months that Telstra has been listed, it has been in a downtrend for 90 percent of the time, which in my book does not make it a good investment. When I ask people why they own Telstra, they always state because it pays good dividends, but in my opinion this is not enough to offset the massive 68 percent fall in price from its all time high in February 1999 to the recent low in March 2009.

Of the top 20 shares, Telstra is the second worst performer over the past 10 years with an average capital loss of nearly 2 percent each year. While T1 shareholders may be in profit, their investment has not kept pace with inflation. T2 shareholders, on the other hand, are in the worst position suffering heavy losses since the float and T3 shareholders are now also in a losing situation. Looking forward, I don’t believe there will be any significant improvement with the share price in the coming years unless the board takes drastic action. In my opinion Telstra will continue to be a big white elephant that just plods along. While most Australians who own this stock will continue to hold, I believe they would be better off selling it and investing their money elsewhere.

So what can we expect in the market?

I expected the market to fall away this week to test the previous low but instead it has continued to move up strongly rising around 4 percent. The strength of this move is leading me to change my short term expectations, especially since the previous high of 3762.50, achieved on 9 January, was broken today.

It is now possible that the All Ordinaries will continue to rise up until around 7 May to my target of between 4200 points and 4500 before falling into a low over one or two weeks sometime between 7 and 22 May. There is a concern right now with how the market is unfolding, as it may result in larger falls when the market does turn, which will most likely hit many uneducated investors who may have just bought in thinking the bull market is underway. Anyone suggesting that the bear market is over is in my opinion being premature. I still believe investors need to act with caution when buying stocks and to always use a stop loss to protect capital.

Dale Gillham
Chief Analyst
Wealth Within