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Rudi’s View: Amcor, Banks, Winners & Losers In Gold

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 28 2019

In this week's Weekly Insights (published in two parts):

Crucial Question: Is It 1995 or 2007?
-Conviction Calls
-Gold Stocks: Winners & Losers

-Rudi On Tour
-Rudi Talks

Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Stockbroker Morgans summarised the situation neatly in its Australia Strategy report this week: earnings forecasts are falling, still, for corporate Australia and companies have continued to issue profit warnings, but a surprise outcome in the federal election in May and a sharp fall in government bond yields have injected strong positive momentum into Aussie equities.

Morgans' strategists continue to see "compelling opportunities" in Big Four banks, China exporters and oversold energy stocks.

In addition, the stockbroker summed up its sector favourites, which generated the following list of go-to stocks for investors in Australian equities:

-Among banks: Westpac ((WBC))
-Diversified Financials: Macquarie Group ((MQG)), Afterpay Touch ((APT)), Kina Securities ((KSL)) and Australian Finance Group ((AFG))
-Industrials: Orora ((ORA)), PWR Holdings ((PWH)) and Acrow Formwork and Construction Services ((ACF))
-Healthcare: ResMed ((RMD)) and Sonic Healthcare ((SHL))
-Telcos and IT & Software: Telstra ((TLS))
-Consumer Staples: Woolworths ((WOW))
-Consumer Discretionary: Aristocrat Leisure ((ALL)), Lovisa Holdings ((LOV)), Baby Bunting ((BBN)), AP Eagers ((APE)) and Noni B ((NBL))
-Resources: OZ Minerals ((OZL)), Evolution Mining ((EVN))
-Energy: Oil Search ((OSH)), Origin Energy ((ORG)), Senex Energy ((SXY)) and Cooper Energy ((COE))
-Food, Agriculture and Chemicals: Treasury Wine Estates ((TWE)) and Costa Group ((CGC))
-Infrastructure and Utilities: Sydney Airport ((SYD)), APA Group ((APA))
-Online media: oOh!media ((OML))
-Property: Aventus Group ((AVN)), APN Convenience Retail REIT ((AQR)), Viva Energy REIT ((VVR)) and Centuria Metropolitan  REIT ((CMA))

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Analysts at Bell Potter have equally lined up their sector favourites for the financial year ahead.

-Among banks and general insurers the top three consists of Macquarie Group, Westpac, and National Australia Bank ((NAB))
-Listed Investment Companies (otherwise known as LICs): WAM Capital ((WAM)), Plato Income Maximiser ((PL8)), and Australian United Investment Company ((AUI))
-Agriculture and Fast Moving Consumer Goods (FMCG): Synlait Milk ((SM1)), Select Harvests ((SHV)), and Elders ((ELD))
-Technology: Integrated Research ((IRI)), TechnologyOne ((TNE)), and Catapult Group ((CAT))
-Discretionary retail and professional services: Lovisa Holdings ((LOV)), Temple & Webster ((TPW)), and Propel Funeral Partners ((PFP))
-Travel and tourism: Flight Centre ((FLT)) and Helloworld Travel ((HLO))
-Resources: Nickel Mines ((NIC)), Pantoro ((PNR)) and Regis Resources ((RRL)) among base and precious metals; FAR ltd ((FAR)), Metals X (MLX)) and Orocobre ((ORE)) in oil, gas & lithium
-Healthcare and biotech: Starpharma ((SPL)), Mesoblast ((MSB)), Pharmaxis ((PXS)), Avita Medical ((AVH)), Paradigm Biopharmaceuticals ((PAR)), and Volpara Health Technologies ((VHT))

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Elsewhere, portfolio managers at Wilsons have been buying shares in Amcor ((AMC)) for multiple funds, while reducing exposure to Wesfarmers ((WES)).

Some stockbroking analysts in favour of owning Amcor shares have been flagging the potential for a large share buyback program to be announced on the back of asset sales and Wilsons too thinks the potential for such a buyback is on the rise.

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Last but not least, I couldn't help but noticing Bell Potter's tech guru Chris Savage has kept TechnologyOne as one of his key picks in the sector, only preceded by Integrated Research in the ranking of most preferred stocks, and followed by Catapult Group in third position.

This new ranking order also means Citadel Group ((CGL)) ws removed post disappointing market update in May, while PWR Group ((PWH)) was downgraded to Hold post strong share price rally, and subsequently also lost its inclusion among the three most preferred for the sector.

As has been the case for a long while, Bell Potter has only one key sell recommendation, and that is for WiseTech Global ((WTC)). Unfortunately for analyst Savage, investors have happily ignored Bell Potter's recommendation, and have stoically continued pushing up the share price.

Shares in WiseTech Global were priced around $12 at the beginning of calendar 2018. They entered 2019 close to $17. They seemed to be heading for $30 last time I checked. Cannot get them all right, right?

Gold Stocks: Winners & Losers

Share prices of AUD gold producers in Australia have been flying high as investors woke up to the fact bond yields are once again retreating into negative territory (inflation-adjusted) and central bankers are getting ready to become more dovish, having already abandoned their hawkish bias earlier this year.

As per always, a rejuvenated gold price -both priced in USD and AUD- has pulled the eternal gold bulls out of the shadows of financial markets. One gold bull last week predicted $20 for Northern Star ((NST)) shares should not be considered impossible, and neither is $100 per share for Newcrest Mining ((NCM)).

Ahem.

What is seldom highlighted is that same gold sector locally is home to some serious capital destruction for investors who picked the wrong stocks in the year past.

Which is why Bell Potter's sector update last week was such a refreshing exercise. The analysts felt compelled to highlight the spectacular wipe-outs (their terminology) that have equally characterised the gold sector domestically, including significant share price falls for:

-Gascoyne Resources ((GCY))
-Dacian Gold ((DCN))
-St Barbara ((SBM))
-Blackham Resource ((BLK))
-Eastern Goldfields ((EGS))
-Artemis Resources ((ARV))

For investors who'd still like exposure, while also avoiding the worst possible outcome from investing in the sector, Bell Potter has nominated Top Picks Pantoro and Regis Resources (both are also included in the top picks for the financial year ahead, see above).

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Analysts at Credit Suisse express the view that, while gold priced in AUD has surged to record highs this month, the rally in gold producers' equities has nevertheless generated stretched valuations all-around.

The analysts have tried to assess what is being implied by the various share prices and come up with the following conclusions:

-Shares in medium-large companies including Newcrest Mining, Evolution Mining and Northern Star are implicitly pricing gold at US$1750/oz

-Shares in mid-cap producers OceanaGold ((OGC)), Regis Resources ((RRL)) and St Barbara are still equivalent to gold priced at US$1277-US$1339/oz

-Shares in smaller cap stocks including Alacer Gold ((AQG)) and Perseus Mining ((PRU)) are seen pricing in US$1296-US$1322/oz

With the price of bullion surging above US$1400/oz, the immediate conclusion to draw is that larger cap quality names are trading at a premium, both to gold and to the rest of the sector, while many other, smaller-cap producers are still incorporating a discount to gold.

No surprise thus, Credit Suisse finds Newcrest Mining shares is the most expensively priced stock in the sector, especially since a large chunk of its annual production is actually copper. The analysts still like Evolution Mining as an overall quality portfolio diversifier.

Most liked is Alacer Gold, because it's cheap and represents "best value".

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Over at Morgan Stanley, gold stocks have completely fallen out of favour. Morgan Stanley's commodities analysts used a general sector update to downgrade Newcrest Mining to Underweight, and to announce that none of Australian gold producers under coverage are left carrying another rating than Underweight.

The reason is, on Morgan Stanley's calculations, share prices for Newcrest, Regis Resources, Evolution Mining and Northern Star are all reflecting a gold price above US$2000/oz, and this makes them overly expensive.

The analysts used the opportunity to lift price forecasts for iron ore and hard coking coal (as well as for gold) which means Whitehaven Coal ((WHC)), Mineral Resources ((MIN)) and South32 ((S32)) are now the top three sector favourites in Australia.

Iluka Resources ((ILU)) is still liked too. Mineral Resources ((MIN)) remains a key pick despite the analysts further reducing price forecasts for lithium near term. Morgan Stanley has been negative on prospects for lithium prices for quite a while now.

Addendum: as sector analysts have continued updating their forecasts, views and preferences for domestic gold stocks, FNArena will follow up later today with an update, see "Which Gold Stocks?" on the website later.

Rudi Talks

Audio interview on Wednesday about what is happening in the share market:

https://www.youtube.com/watch?v=B56bmn1mhU0&t=656s

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 24-25th June 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part two follows on Friday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.) 

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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CHARTS

ACF AFG ALL AMC APA APE APT AQG AQR ARV AUI AVH AVN BBN BLK CAT CGC CGL COE DCN ELD EVN FAR FLT GCY HLO ILU IRI KSL LOV MIN MQG MSB NAB NCM NIC NST OGC OML ORA ORE ORG OSH OZL PAR PFP PL8 PNR PRU PWH PXS RMD RRL S32 SBM SHL SHV SM1 SPL SXY SYD TLS TNE TPW TWE VHT VVR WAM WBC WES WHC WOW WTC