Whilst the
Not surprisingly, BHP shares rose 9% last week. But some smaller resource companies did even better than that, with one of our favourites soaring 40% in the week.
We firmly believe there are some compelling buying opportunities in small resource stocks…but you may have to be quick.
Dear Long-Term Stock Market Investor,
A week can feel like a long time in the stock market. Where 2 weeks ago many stock market glasses were half full, now they are half empty again.
Last week we had another margin-lending broker calling in the administrators, this time Lift Capital. The effects of the Opes Prime collapse continued to reverberate around the stock market, especially hitting the share prices of some smaller resource companies.
The share prices of Tabcorp and Tatts Group were massacred by over 20% each after the Victorian government ended the companies’ gaming licensing duopoly.
All in all, it added up to the benchmark S&P/ASX 200 Index falling 3.2% on the week, its fourth largest weekly loss so far this year. For the 2008 year to date, up till the end of last week it was down a portfolio-damaging 14%.
Then late on Friday our time, US conglomerate and market bellwether GE reported disappointing first quarter results and cut its earnings outlook for 2008. Its shares slumped a whopping 13% on the day, its worst daily fall since the stock market crash of 1987.
The GE result once again confirmed the
The headlines in Monday’s Australian Financial Review were not promising…
“Shares set for a shellacking”
“Gloom gathering as big names report”
“Lift sends that sinking feeling through the market”
“Corporate debt is the next time bomb”
Not surprisingly, Monday saw another 1.8% shaved off share prices, including Virgin Blue plummeting over 20% after warning of lower profits.
But as you’ll see below, we firmly believe there are some compelling buying opportunities, especially amongst smaller resource companies. But more on that a little further down…
Steer Well Clear Of Banks
We’ve been advising our Members avoid the financial services sector for quite some time now. We hate to say “we told you so”, but just take a look at last week’s share price action of the Big 4…
ANZ Banking Group – DOWN 12%
Westpac – DOWN 11%
Commonwealth Bank – DOWN 9%
NAB – DOWN 7%
We continue to advise our Members to avoid the banking sector.
The Resources Boom That Shows No Signs Of Stopping
Yet amidst all the negative headlines, the
· Last week, copper, crude oil, iron ore, coking coal and thermal coal all hit record highs, with oil trading above US$112 a barrel before falling back slightly.
· Although gold has come back from its recent peak of over US$1020 an ounce, it is still up over 20% in just the last 6 months.
· Last week, despite the falling stock market, BHP Billiton shares rose a very impressive 9%.
· In his AFR Weekend Market Monitor column, Glen Mumford said “I hold a view on equities at present…that the market might have already seen its lows.”
· In its April 2008 World Economic Outlook report, the International Monetary Fund (IMF) said that growth in
· Reserve Bank of Australia (RBA) thinks “that demand growth in
Whilst The
Whilst the
It seems obvious to us here that this all adds up to a resources boom that is set to continue for years, if not decades ahead.
Yet, judging by the share prices of some resources stocks, especially at the smaller end of the market, many investors refuse to believe it.
Change can be wonderfully enlightening and motivating. Whilst many people will happily admit to liking change, they continually fail to embrace it, falling back on their old habits or simply doing nothing different.
How else can we explain why we eat the same breakfast most days of the year, or how we are still banking with the same institution we first banked with when we were in primary school?
Change is here. In the years ahead,
We can see the oil price above US$110 a barrel. We can see current oil consumption is virtually equal to current oil supply. We know the world population is growing, and will continue to grow. We can see it is getting more and more expensive to find new oil supplies. But mentally we can’t accept the long-term oil price is likely to stay above US$100 a barrel.
The Inevitable Turnaround In Resource Share Prices
We can see the changing of the guard. Like others, we can see the change. Unlike others, we embrace the change.
We are not stuck in the past, thinking the oil price will one day return to US$50 a barrel.
Despite its pull-back from US$1000 an ounce, we remain extremely confident in the long-term appreciation of gold in the face of a falling US dollar.
But there’s one thing we are not changing…that we continue to recommend our Members stick with the strength of this market, which is the resource sector.
In fact, in our most recent report to Members, we said “…the resource sector continues to present a tremendous buying opportunity. We encourage Members to remain patient and to wait for the inevitable turnaround in resource equities that we believe is not far off.”
In fact, the turnaround may have already started – a little further on we highlight a
Market Up, Market Down, Shake It All Around
At this stage, it’s worth reminding everyone that stock market investing should be long-term in nature – we’re talking 3, 5 and 10 years or more.
Share prices go up and down every single trading day. Some are “good hair days”, others are “bad hair days”.
One day everyone is worried that the
The day after everyone is euphoric because the
It’s impossible to predict what the share prices of companies will do on a day-to-day, week-to-week or even month-to-month basis. Much easier to predict is what they will do on a year-to-year basis.
If you believe, as we firmly do, that…
· The Chinese growth story is here to stay for years and decades ahead;
· The oil price and the price of commodities in general are going to rise in the years and decades ahead;
it follows that you should invest in companies set to benefit from those mega-trends, and that you should do so with a long-term perspective.
As if to emphasise the point, commenting on the North American markets, Trapeze Asset Management recently said the following…
“Over any 20 year period stocks have always outperformed all other asset classes. Over any 15 year period stock outperformance drops to 93% (although it would also be 100% if you exclude the '30s depression); over any 10 year period, 89%; over any 5 year period, 74%; and, for any 1 year period, 70%.”
Also remember history has shown that time in the market is more important to your returns than timing the market.
This Market Offer Tremendous Buying Opportunities
We believe there is a fundamental disconnect between the performance of resources share prices compared to the record commodity prices.
Whilst that might be frustrating for people who already own resources stocks, as we said earlier, we believe the disconnect offers patient, rational, long-term investors with tremendous buying opportunities.
This is especially so at the smaller end of the market. Many smaller resource stocks have seen their share prices hammered because of …
· Forced selling to meet margin calls.
· Opes Prime/Lift Capital related selling.
· Panic selling by people getting out the market at whatever cost, just to end the pain.
· A general lack of appetite to invest in smaller resource stocks, otherwise known as a flight to quality.
Of course, not all small resource stocks are made equal. For every quality resource stock, there are 20 or so very poor stocks, complete will little cash, highly speculative exploration tenements and with management whose number one priority is to try and cash in on the great mining boom of 2007.
The Perfect Time To Buy
What have margin calls, forced selling, panic selling and a flight to quality got to do with the value of a decent small resources company?
Not much.
What have margin calls, forced selling, panic selling and a flight to quality got to do with the price of a decent small resources company?
Quite a lot.
One of our favourite quotes of stock market investing legend Warren Buffett is…
“Price is what you pay. Value is what you get.”
The price of a company changes much more quickly than the value of a company. At any given moment, there can be a disconnect between the price of a company and its underlying value.
Because of a soaring share price, driven higher by greed and speculation, a company can be significantly over-valued.
Because of a sharply falling share price, driven lower by fear and forced selling, a company can be significantly under-valued.
One of the keys to successful stock market investing is to do so with a margin of safety. If, in your opinion, a company is significantly under-valued compared to its future profitability, that is the perfect time to buy.
Of course, there is no guarantee the share price of a cheap company cannot fall even further. But only in the short-term.
In the long-term, value is always rewarded.
There’s $380 Million Worth Of Value In This Oil Company
Let’s use a simple example to illustrate the point.
· You assume the long-term oil price averages between say US$80 and US$140 a barrel.
· You discover a company which is budgeted to produce around 300,000 barrels of oil in 2008, with profit margins after all expenses over US$50 a barrel. That translates into budgeted profits of around $16.5 million. You estimate the value of this existing field at around $120 million.
· As well as the potential to further develop its existing oilfields, the company has further growth potential from two identified opportunities. One has the potential for one million recoverable barrels of oil, the other is estimated by the company to be worth between $135 million and $200 million. There are significant other growth opportunities too.
· The company is profitable, has no debt, has $11 million in cash, and is planning on drilling 15 more wells in 2008. It has a respected management team with hundreds of years of collective oil industry experience.
· In a recent broker presentation, the company itself estimated its total risked potential value to be around $380 million.
What price might you expect to pay for this company with an estimated value of $380 million?
Remember, price is what you pay, value is what you get.
In a “greedy” market, you might expect to pay around $340 million, a modest 10% discount to its estimated value.
In a “normal” market, you might expect to pay around $265 million, a 30% discount to its estimated value.
In a “fearful” market, you might expect to pay around $115 million, a 75% discount to its estimated value.
Would you be prepared to pay $115 million for this company? We’d suggest you’d seriously consider it.
Wake Up Market And Smell The Coffee
By this stage, you’ve probably twigged that this is a real company, a company we recommended our Members BUY back in July last year.
In our most recent update to Members, we said…
“When we last covered it we thought the company was a bargain-priced entry then, but over the past few months the story has advance significantly and become more attractive. In the meantime the company’s share price has halved, making the company extraordinary value in our opinion. When will the market wake up and smell the coffee, we ask?”
How much would you pay for this company?
We suggested above you’d seriously consider paying $115 million.
How about if we told you today, you can pay around $80 million for this company?
The price is $80 million. The value is $380 million. To us, that is investing with a large margin of safety.
Warren Buffett once explained how he looks at margin of safety…“You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges."
The Coal Explorer Whose Share Price Soared 40% Last Week
Thankfully, not all smaller resource stocks have had their share prices in the doldrums.
As reported in the AFR last 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.
Last week we told you about the key winner we thought we’d found from the trebling in the coal price. We said it was a company that happily flies under the radar of most of the resource investment community.
We said…“At a market value of around $260 million…we think it’s just a matter of time before this small
It seems like it hasn’t taken too long for the market to recognise the company’s value – last week alone, the share price jumped almost 40%.
As a reminder, there are plenty of other things to like about this company too…
· It has no debt and $55 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 over 100 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,
We think the firm share price gains last week signal a clear revival of longer-term upward momentum. Given the strength of global coal prices, we believe the outlook for this
The charts also remain promising. Just last week we said…
“Notwithstanding the potential for a brief period of consolidation in the near-term, we believe that prices will soon break above resistance at 80 cents. In our opinion, such a move will add further buoyancy to positive investor sentiment, opening the door to an eventual retest of the all-time high of January at $1.135.”
This week, the share price has indeed broken above the 80 cents resistance level, meaning that from both a charting and a value perspective, the future looks very promising for this
Beware: Share Prices Can Rise VERY Quickly
In a tough market such as this, it’s virtually impossible to predict when a company’s share price will reflect its value.
The oil explorer/producer above is still waiting for its price to catch up to its value. But if you are approximately right in your valuation of a company, the share price will eventually reflect that value. You just don’t know when.
But, when it happens, it can happen very quickly, as we have seen with the
Another of our Report companies saw its share price jump a whopping 25% in just one day this week alone.
In our most recent Report to Members, we said…
“We continue to rate this company as one of the sector’s best pure exploration plays…they have one of the best acreage packages and technical teams in the business.”
Since that Report, just a few weeks ago, the share price has jumped OVER 50%.
Yet, even after that jump in the share price, the whole company is valued at around $13 million, of which around $7 million is cash.
The company is a focused explorer searching for world class ore deposits iron, oxide, copper, gold and uranium in
With the small explorer having recently recommenced drilling on one of their project areas, and more drilling slated for the second part of this year for their other project area, we look forward to more positive news – news that will hopefully soon see an increase in the company’s value and also its share price.
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 Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…
Terramin
Andean Resources – Up an amazing 524%* since November 2005!
Platinum
(Share prices taken on Monday 14th 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.”
Know Exactly Which Shares To Buy When The Market Rebounds
We pride ourselves on being prepared. Between our two flagship publications we currently have OVER 100 different companies in our hypothetical portfolios.
Our experienced analysts also have a solid working knowledge of hundreds of other companies too. Many of the companies we follow are smaller companies, some of which have been hammered during the recent market sell-offs.
But rather than panic, we see many of the share price falls in smaller resource stocks are great buying opportunities – witness the companies highlighted above.
With the share prices of some of our specially selected small resource companies shooting higher in a matter of days, we urge you to act now in order to access our current recommended stocks.
We wish you happy and profitable long-term investing.
P.S. On Tuesday this week, QBE announced a takeover offer for fellow insurance group IAG, owner of the NRMA, SGIC, SGIO brands, amongst others. The offer was rejected by IAG, yet IAG’s share price still jumped 11%. Only last month, IAG’s shares languished around the $3.20 mark, some 38% less than the price now. It took the takeover offer to do it, but now the share price is a lot closer to the company’s value – as we said above, value is always rewarded, eventually, and sometimes faster and quicker than anyone expected!
P.P.S. The poor share price performance of the West Australian gold explorer we told you about a few weeks ago continues to stagger us. We have had numerous meetings with their Managing Director, and we must reiterate that in our view the company appears to be doing everything right. We think the current price weakness will soon present an outstanding buying opportunity for astute investors.
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