AV Jennings (AVJ) - Buy

Even though the residential property market does not appear cheap, the current housing undersupply in AVJ's markets offers the company solid earnings potential. The share price has weakened recently due to worldwide mortgage market concerns but we believe the company is set to increase future profitability following a forgettable last few years.

External pressure is also likely to be a key driver of the share price as activist major shareholder Guinness Peat Group, aggravated by operational and share price underperformance, seeks a greater say in the company's day-to-day running. Recent earnings results suggest a profit turnaround is continuing and we will closely monitor AVJ's progress. While not an investment for everyone, we do not believe recent events have changed the outlook for AVJ and the company remains a buy.

Austar (AUN) - Sell

Austar has been a long term holding in the Fat Prophets Portfolio and we have taken profits on a number of occasions. We have maintained some exposure on the expectation of Austar being a takeover target, however the reluctance of potential suitors to pay $2 per share for the company has seen the premium seep out of the share price in recent weeks.

Austar also just announced a potential capital restructure and a capital return of $300 million. Given regional pay-TV is a near monopoly, Austar can take advantage of low borrowing costs to keep its overall cost of capital relatively low. While we acknowledge the quality of the asset, the highly geared balance sheet increases the financial risk and we are therefore selling the remainder of our holding. Austar will be removed from the Fat Prophets Porfolio.

Salmat (SLM) - Hold

Salmat recently made an offer for business processing and outsourcing unit HPAL, providing scale to its outsourcing operations. The HPAL board has recommended shareholders accept the offer and if all goes according to plan, the merger should be completed by late October. Salmat reported full year earnings just last week and while the share price looks fundamentally stretched on those earnings, there are synergies and merger benefits to take into account when assessing the company's future prospects. Salmat will trade 'ex' a 10 cent dividend around 7 September.

GRD Ltd (GRD) - Hold

We have covered GRD on a number of occasions recently. The company knocked back a conditional offer from Transfield at $2.75 per share and this saw its share price fall heavily. We have outlined our rationale for continuing to hold in past reports. We believe the business is an attractive one and the valuation is sound given GRD's prospects.

Telstra (TLS) - Hold

Telstra's recently released full year result was impressive, but management didn't do the share price any favours by issuing subdued guidance for 2008. This saw the share price pull back following the result and last week's market volatility obviously didn't help. Despite this, we believe Telstra remains a solid defensive play in an uncertain market. It's not the cheapest stock around but we see considerable value in the company's asset base.

This viewpoint will become important should the impasse over a high-speed broadband network continue. Telstra owns the main telecommunications infrastructure network in Australia, which means getting anyone else to build the new broadband network will prove very difficult without Telstra's co-operation. Could a separation of Telstra's infrastructure and service operations be on the cards? We will expand on this theme in future reports. Lastly, Telstra traded 'ex' a 14 cent dividend on Monday.

Fone Zone (FZN) - Hold

This has been a disappointing recommendation from us and we apologise to those Members who are currently underwater on this stock. The company's results are due out in a few weeks time and while management have previously informed us they are on target to meet guidance (around $6m), the outlook statement will be crucial as the market is expecting a profit rebound. There have been rumours that JB Hi Fi could be interested in taking over a distressed Fone Zone, given the music and electronics retailer's recent tentative move into mobile phone distribution through an arrangement with Telstra. However, there is much uncertainty around the stock and we expect continued volatility in the weeks ahead.

SP Telemedia (SOT) - Hold

Since trading 'ex' a special dividend of 11.5 cents on 11 July, SOT's share price has continued to fall. And we are not entirely sure why, as there have been no announcements from the company. WIN TV have a 13 percent stake and having missed out on the NBN network to PBL media, are considered a seller. This creates an 'overhang', which can depress a stock price in the short term. In addition, WH Soul Pattinson's 44 percent stake makes the stock relatively illiquid.

Given the recent nervousness in the market, investors are selling down smaller stocks with lower earnings visibility and we believe SOT is a victim of this. However, SOT remains fundamentally cheap and we therefore have confidence that the stock will recover in price. The company has a July year end so full year results, due to be released in mid-September, will provide the market with a clearer picture.

Australian Pharmaceutical Industries (API) - Hold

Our initial recommendation was based on API being a 'special situation' and despite the poor share price performance in the early months, we remain confident that the business can improve. API consists of pharmacy distribution and the Priceline retail brand. Profitability from both divisions is poor and given renewed management focus, we believe profit margins will be restored progressively over the next few years. There is even potential for a break-up, and we believe this would benefit shareholders, as greater value would be placed on the high growth Priceline brand.

Babcock and Brown Capital (BCM) - Hold

The market has dealt harshly with all things Babcock and Brown in recent weeks. This extends to BCM, the investment bank's publicly listed private equity vehicle. The fund is highly geared, but all the debt is at a fixed margin over Euribor (Euro inter bank offered rate) In addition, two-thirds of this debt is hedged against an increase in the Euribor rate. While Euribor has increased following last week's credit crisis, BCM appears adequately protected.

We will gain a clearer picture of BCM's situation following release of full year results next Tuesday, after which we will provide a full update. We believe the fund is still attractively valued at current levels and with plenty of cash on the balance sheet, BCM has an option to buy back some of its outstanding shares.

Platinum Japan Fund - Hold

As we reported in FAT337, the Platinum Japan Fund has suffered over the last year due to the fund's expectation of a Japanese domestic recovery and strengthening of the yen. While the strategy has hampered the short-term performance record, the fund's management team are sticking to their guns. And given the latest strengthening of the yen, their stance seems to be paying off. During periods of uncertainty, a value-orientated manager such as Platinum offers investors a comparatively safe harbour.

Caltex (CTX) - Hold

Having run ahead of itself somewhat, investor enthusiasm had started to wane for Caltex following the release of a weaker than expected first-half result in June. Since then, the latest bout of market uncertainty has seen further weakness in the stock price. However, given our view of continued strength in oil prices, we believe the Aussie petroleum refiner remains a solid long-term investment. At current levels, the stock trades on a 2009 price-to-earnings ratio of 12.5 and dividend yield in excess of 4.5 percent. In the weeks ahead, we will continue monitoring the stock with a view to gaining additional exposure if such an opportunity presents itself.

Foster's Group (FGL) - Hold

After a tough year, Foster's CEO Trevor O'Hoy could do without the market's renewed focus on risk. Management have had a difficult time implementing their new strategy with 2008 set to be a critical year for the company. In fact, there is even the prospect for the business to split into independent wine and beer operations. While we believe Mr O'Hoy would prefer to see the wine division built into a success before any split, further disappointments may force his hand. However, with Foster's due to report full-year results this month, we will provide a detailed report in the weeks ahead.

Austal (ASB) - Hold

West Australian shipbuilder, Austal, has been a long standing feature of the Fat Prophets Portfolio, enjoying considerable success in the commercial fast ferry market. More recently, management have been able to leverage Austal's ferry designs to enter the defence market. Indeed, their expertise in research and development is a considerable competitive advantage for the company.

The most exciting element of the defence business is the US Navy's Littoral Combat Ship project. However, increasing costs for both Austal and Lockheed Martin's designs have caused the US Congress to question the project's viability, in consequence pressuring the share price. But with Austal's commercial order book fit to burst and management looking to gain a greater share of the lucrative US defence budget, we remain positive about Austal's future.

Tox Free Solutions (TOX) - Hold

TOX reported solid earnings for the 12 months to June and provided healthy growth guidance for the 2008 financial year. However, this wasn't enough for the company to avoid last week's sell-off. Regardless of what the share price does on a daily basis, we are focussed on what the company is doing. As an industrial waste management outfit, TOX has benefited from a boom in its home market of Western Australia, servicing the oil and gas, and mining and ship building industries.

And TOX's position in WA remains strong, secured by various barriers to entry. Its impressive and successful acquisition trail, a testament to management quality, does not look like it will stop soon. This aggressive reinvestment back into the business and an undemanding valuation provides additional support for our bullishness on this growth stock.

Biotech

Biota (BTA) - Hold

As detailed in a number of recent reports, Biota's main revenue stream is from the sale of anti-viral drug Relenza, marketed by GlaxoSmithKline. Given the company has no debt and plenty of cash on the balance sheet, we do not expect the business to be at all impacted by recent credit market events. Even in the event of an economic slowdown, Biota's business model and income stream remains protected. The biggest risk is that the company is fighting a court battle with Glaxo and claiming for a massive amount of damages. This is costing money and the market will likely discount this risk into the share price until resolution. However, the company remains highly confident of its claim and we suspect an out of court settlement may eventuate before going to trial next April.

Avexa (AVX) - Hold

Having no current earnings, biotech companies such as AVX are always going to feel the affects of a volatile market, so last weeks sell off was not altogether surprising. Regardless of the share price, we are focussed on the fact that AVX is on the path to launch Phase III trials of its HIV drug ATC. At June 30, the company had around $76 million in cash on the balance sheet, enough to see the trial phase through for some time. This is comforting in a market where the cost of capital appears to be increasing. Given the huge potential market for HIV related drugs, and AVX's successful results to date, we would not be surprised to see interest from a multi-national drug company should Phase III trials also prove positive.