Is it safe to buy stocks now? We believe resource stocks continue to represent outstanding value, with 2 of our very favourite resource stocks included in the 5 stocks we’ve just recommended our Members BUY now.
Dear Hopeful Stock Market Investor,
In case you missed it…
· Last week the Australian stock market jumped by over 5%, the best weekly return since August last year.
· Over the past fortnight, the Australian stock market has jumped almost 9.4%, the best 2-week rally since June 1987.
· The
· Martin Conlon, Schroder Investment Management head of Australian equities was quoted in the Australian Financial Review (AFR) as saying “The major positive at the moment is that there are a few signs of life in credit markets. Certainly, there seems to be some sign that liquidity is returning and some deals are getting done.”
Is It Safe To Buy Stocks Now?
So is it safe to get back into the stock market?
As ever, it depends.
It depends on whether you…
· Have a long-term investing perspective.
· Are buying the right stocks at the right price.
· Are avoiding the wrong stocks in the wrong sectors.
· Are avoiding excessive use of margin lending.
· Have a clear, understandable stock market investment strategy, one that you will continue to follow regardless of the day-to-day movements in the stock market.
· Can stomach 20% falls in the value of your portfolio whilst still sleeping well at night and not being spooked into panic selling at precisely the wrong time.
Is It REALLY Safe To Buy Now?
So is it really safe to get back into the stock market?
We like to think our actions speak just as loudly as our words.
Just last week we said…
· We continue to strongly believe that precious metals, oil and commodity sectors will outperform the market over the medium to long-term.
· BHP
Hogwash – Resources STILL Set For A Decade Long
· Some commentators seem to believe the commodity sector is in a bubble and the sector will fall throughout the year. To that we say hogwash. Whilst we may see a flight out of resources temporarily into the financial and industrial sectors, we still believe the resource sector is the place to be and that the bull market has at least a decade to run.
· As an aside, Jim Rogers, investor and outspoken financial commentator, famously predicted the commodities boom years ago. In a 2006 interview, he said "the shortest bull market in commodities I could find lasted 15 years, and the longest lasted 23 years. So, if history is any guide, this bull market will last sometime until 2014 and 2022."
· As another aside, last year, prominent investor Marc Faber was quoted on Bloomberg as saying "The up wave of the [current commodities] cycle is likely to last another 15 to 20 years." So just another 14 or 19 years to go...
· Regardless of the overall direction of the market, there are always opportunities and in fact we have just recommended 5 stocks that we believe represent good long-term buying opportunities.
The Five Stocks We Have Just Recommended As BUYS
Stock #1 – BUY this large resource company
“…we see the recent share price weakness as an opportunity to add a quality large resource company to Members’ portfolio.”
Stock #2 – BUY this Aussie ship builder
“…last year’s decline in investor enthusiasm…did not reconcile with the company’s strong fundamentals.” Now that we see a more favourable charting picture, plus a more general reassessment of the company by investors, we have upgraded this ship builder’s shares to a BUY.
Stock #3 – BUY this small West Aussie waste management company
“Smaller companies have suffered heavily in 2008 and this integrated waste management company has been no exception. Since October the stock has declined more than 40%.”
Stock #4 – BUY this global insurance company
“…we believe a strong value investment case has emerged. This is a high quality business whose high calibre management team have a proven track record in delivering shareholder value. As such we believe the stock will reward long-term investors…”
Stock #5 – BUY this major gold miner
“…we believe the recent pullback in the company’s share price is a buying opportunity.” For Members looking for exposure to an emerging world class gold miner, we recommend them as a BUY.
ANZ Down, BHP & Rio UP
As evidence that the big banks are not quite the bargain sector they may first appear, on Monday this week ANZ Banking Group warned its first half credit provisions will total close to $1 billion.
To put that into some perspective, ANZ’s comparable write-down for the whole of 2007 was a not insignificant $567 million, and this year’s first half write-down is a 72% increase on the 2007 half year figure.
Not surprisingly, the ANZ share price slumped 6.6% on the day, dragging down most of the other banks, including Commonwealth Bank, NAB and Westpac. And going in the other direction on the day were, surprise, surprise (not)…
BHP Billiton – UP 5.1%
That huge ANZ write-down is before we even touch on the very real possibility of falling Australian house prices in 2008 and beyond. According to the International Monetary Fund, Australian property is among the most overvalued in the developed world and the risk of a correction in house prices is high by international standards.
ANZ said it doesn’t expect any material losses from its exposure to the Opes Prime collapse – it’s just the poor unsuspecting Opes Prime clients who will wear those losses.
A Quick Word On the Opes Prime Collapse
We cannot help but sympathise with individual investors who look like losing thousands and even million of dollars following the collapse of Opes Prime. This sad story posted on the Business Spectator website is very sobering – from a net worth of $400,000, one family has lost everything to the Opes Prime collapse.
Clearly many people didn’t realise that when they handed over their portfolio to Opes Prime, they also handed over legal ownership of those shares. Making it even harder to stomach, it seems like there is evidence that some of the Opes Prime marketing material could have been considered misleading on the ownership point. We’ll leave that one for the lawyers to sort out.
The whole Opes Prime collapse is inextricably linked to margin lending gone wrong. There is also some suggestion of desperate fraud as the firm’s and some individual’s stock market losses quickly spiralled out of control.
The lessons are clear…
· Always read the fine-print before signing a legally binding contract.
· Know the firm you are dealing with.
· Margin lending is not a one way bet.
· When you play with margin, you automatically increase your risk levels and decrease your investing time frame.
· Greed and over-confidence are a bad combination when it comes to stock market investing.
· The stock market can go higher and fall lower for longer than you think it rationally should.
· Just because a stock is cheap, doesn’t mean it can’t get cheaper, in the short-term.
We wish those innocent people caught up in this mess the best of legal luck in getting as much as their money back as possible.
Opportunities Galore In Small Resource Stocks
Due in some part to the Opes Prime collapse, in some part to other forced margin selling, in some part to the general market decline, and in some part to a general lack of excitement in what once was the sexiest sector on earth, the share prices of many smaller resource stocks have been in the doldrums.
Looked at rationally, many of the share price falls just don’t make sense. If anything, as the underlying prices of commodities like gold, copper, oil, iron ore, platinum and coal have risen, the share prices of smaller resource companies have fallen.
What gives? Obviously some of the smaller resource stocks are highly speculative in nature. Given the wholesale de-risking of the stock market, it’s not surprising many of the stocks at that particular end of the market have been hammered.
Luckily we’ve always avoided those highly speculative stocks, so no damage done there.
Shoot First, Ask Questions Later
Many smaller mining companies rely on regular capital raisings to fund their exploration programs, their mine builds, and their early mining operations. With the capital markets nowadays being very discerning about what companies they will fund and who they will be associated with, again the share prices of some of the more speculative mining stocks have paid a heavy price.
But it’s not just the speculative end of the market that has been hammered. This market is in a “shoot first, ask questions later” mood. It struggles to separate the good from the bad. It is throwing the baby out with the bath water.
Whilst that may lead to short-term pressure on the share prices of some of our favourite small resource companies, it does offer excellent long-term investment opportunities, some of which almost look too good to be true.
But true they are…
Two Beaten Down And Downright Cheap Oil Explorers
Take the two beaten down oil companies we recently told you about, who despite their share price woes, we think are very well placed to ride the resources boom for years to come.
It is worth remembering that whilst the share prices of these and some of the other oil companies have fallen, the oil price has risen from around US$80 a barrel to as high as US$110. Go figure.
Beaten Down Stock #1 – A small oil production and exploration company whose share price has fallen over 50% from its recent peak, leaving the whole company valued at around $65 million.
Today the company is forecasting profits of over $16 million in 2008, putting the company on a price to earnings ratio of just 4 times. If that’s not enough, the company themselves think their own shares might be worth around $1.55, some 384% above their current share price.
Beaten Down Stock #2 – The company about whom we recently told our Members that “Despite continuing to add impressively to its West Australian mineral sands position through aggressive exploration, the company has recently hit a brick will with respect to its share price.”
The shares are off 40% from their recent peak. We believe the market is missing out on a fantastic longer-term opportunity, and the company remains a core holding in our portfolio.
Oil Headed Up To US$137 A Barrel?
As regular readers will know, we’ve long been bulls on the oil price. But don’t just take our word for it….
As reported last week in the AFR…
“Barclays Capital has put a rocket under its long-term oil price forecast, predicting the price of the black gold will average US$137 a barrel until 2015, up 44 per cent on its previous estimate made 18 months ago.”
Demand for oil is soaring worldwide. And the fast-growing economies of
In a recent CNBC interview, legendary
Then there’s the legendary investor Warren Buffett who in a recent interview also on CNBC said “…if we're going to use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the next five or 10 years, we're going to have a tough time maintaining production that satisfies those at this price, even.”
But it’s not just the oil price that’s set to go even higher…
Our Key Winner From Coal Trebling In Price
As reported in the AFR this week, Korean and Japanese steel makers have confirmed the price of coking coal for 2009 contracts was settled at US$305 a tonne, more than trebling the current price of US$98 a tonne.
The paper reports that BHP Billiton will be the key winner from the price increase, potentially boosting their earnings by about a staggering US$5 billion.
We also think we’ve found another key winner, one that happily flies under the radar of most of the resource investment community. At a market value of around $260 million, compared to BHP’s $225 billion, we think it’s just a matter of time before this small
There are plenty of other things to like about this company too…
· It has no debt and $56 million cash in the bank.
· It is focused on coal exploration and development in
· Its aim is to progress its current identified coal resources towards production within the next few years whilst at the same time, further exploration will hopefully yield new coal deposits – it has an aggressive exploration programme during 2008 worth $15 million, almost double last year's budget.
· In terms of resources, it aims to boost its coal resources from around 90 million tonnes to somewhere between 280 - 480 million tonnes.
· In terms of production, it is targeting first coal production during 2011 and has a target of 12.5 million tonnes of coal production by 2014/15.
· Longer-term coal demand is anticipated to rise by around 60% between now and 2030, according to the World Energy Council. Of this demand,
And all this for a company currently worth just $260 million, of which $56 million is cash. No wonder we currently rate this company as a BUY, having done so since mid December, in which time the share price has hardly moved.
But that may be about to change, given the threefold increase in the price of coking coal.
Searching For More Great Small Resource Companies
We are value investors. We don’t just search for cheap companies. We search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.
We generally focus on smaller companies because they are generally over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.
Some of our very best recommendations have been smaller companies.
For example, each of these companies was initially recommended to our Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…
Carnarvon Petroleum – Up an amazing 826%* in a little over 2 years!
Terramin
Platinum
(Share prices taken on Monday 7th April 2008. Gains don’t include dividends.)
Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.
“I am more excited about the next 12 months than I have been in the last two or three years.”
We wish you happy and profitable long-term investing.
P.S. Southern Cross Equities resources bull Charlie Aitken was quoted in this week’s AFR as saying the threefold increase in coal prices showed the demand for Aussie resources is real, and that coal is just the first commodity to benefit, with copper and iron ore likely to follow. We think it all bodes well for the future share prices of our smaller resources companies, especially the
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