Fortescue – The Quintessential Nigel No-Friends

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By Rudi Filapek-Vandyck

There are probably a billion reasons why a certain stock can end up -temporarily or permanent- as a “Nigel No-Friends”, but history shows the most common denominator is “price”. If you’re too expensive, stockbrokers don’t like you anymore. If the share price refuses to come down, those stockbrokers will all reverse their Buy and Hold ratings into negative investment views. Hence why we at FNArena like to talk about “Nigel No-Friends”.

Strictly taken our usage of the term is inherently flawed because if the stock would have no friends it probably would fall in price, and probably a lot, which would instantly turn it into a Buy again! (Think about this the next time you do your research on our website).

So, our Nigel No-Friends often have many friends, just none among stockbroking analysts.

Press the “Low Sentiment” button next to the FNArena Sentiment Indicator on the website and you’ll instantly see which stocks currently populate the list of all Nigel No-Friends in the Australian share market. Some of these stocks, like Ten Network ((TEN)), PaperlinX ((PPX)) and ING Industrial Fund ((IIF)) have been enjoying the lowest ebb of broker sentiment for a while now.

The same applies to Wattyl ((WYL)), Minara ((MRE)), Prime Television ((PRT)) and Perpetual ((PPT)). The irony of ranking stocks according to broker ratings is that often (not always though) investors will find that the most interesting share price actions take place amongst these stocks – as opposed to the stocks that make up the top of the market in terms of broker ratings such as Spark Infrastructure ((SKI)), Macquarie Leisure ((MLE)) and Origin Energy ((ORG)). All three have been at the top for a long time. Maybe we should start calling them Nigel No-Friends instead?

Is it good to have many friends among stockbroking analysts?

Well, if you’d paid attention while I was explaining all of the above, you’d probably responded by now that it seems but a fair conclusion that having many stockbroking friends usually comes hand in hand with a lack of friends in the market itself – where it truly counts. This is not true, of course. At times both can co-exist, but only for so long. At some point the share price will simply have run up too high, making the maintenance of Buy ratings unsustainable.

It’s only when a high ranking according to broker views seems to have become a well-entrenched habit that investors should start asking the question why nobody else seems to be willing to join the stockbrokers’ circle of friendship. Stay clear from stocks that always seem to have a high number of Buy ratings, they are most likely the true and genuine Nigel No-Friends in the market.

If, however, we stick to our initial definition (if you’ve forgotten by now, see first two paragraphs above) then Fortescue Metals ((FMG) is one truly Nigel No-Friends. It took a long time before any stockbroker outside early backer Southern Cross genuinely started paying attention to Twiggy Forrest’s newest stockmarket adventure and by that time Forrest had gathered many friends outside the stockbroking community – and I am talking many, many friends.

Of course, that was before the share price came crashing down from $13 to close to $1. Many former friends are likely to have become a lot less interested to remain in contact, but Fortescue never really fell of the market’s radar. The share price twice briefly rose above $4 this month – friends galore thus.

But Twiggy and Fortescue have few friends among stockbrokers. Eternal backer Southern Cross has continued singing the company’s praises, of course, and the commodity bulls over at GSJB Were are also prepared to put a higher valuation on the shares than most colleagues elsewhere are prepared to do – but that’s about it. GSJBW rates the shares Hold and its target price presentlty stands at $3.25 – well below the $3.77 Fortescue shares closed at on Friday.

To put this in perspective: JP Morgan has a price target of $1.03 and UBS of $2.70. Most other stockbrokers sit somewhere in between. Now you know why Fortescue seems to have a near inexplicable attraction for broker Sell ratings.

Too many friends, but none work for the likes of JP Morgan, RBS Australia or Citi. Or Morgan Stanley for that matter. Analysts Craig Campbell and Cameron Judd at Morgan Stanley again explained this week why they, and most other stockbrokers, don’t like the stock: it’s well over-priced. To put it in their own analyst lingo: “the Fortescue share price that recently exceeded A$4/sh reflects unrealistic expectations”.

Both analysts state they have been running various scenarios and no matter how bullish their input, there’s simply no way they can justify anything near the present value investors are willing to pay for the stock on the open market. What investors in essence are saying, say both analysts, is that iron ore prices will rise in 2010 by 42%, followed by another price rise of 45% in 2011, plus that Fortescue will successfully embark on an aggressive production expansion, at higher investment returns than currently believed possible.

Seems like a scenario even the most blinded China bulls wouldn’t dare to put forward.

The question remains whether Fortescue’s friends in the market will at some stage start paying attention. Until that time Fortescue is set to remain Nigel No-Friends. Among stockbrokers that is.

Morgan Stanley rates the stock Underweight in combination with a “Cautious” sector call. The price target is $1.08.

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