Is It Time To Sell The Big Australian?

FYI | Jul 09 2019

By Peter Switzer, Switzer Super Report

Iron ore stocks such as BHP were drawn into an intriguing story when we learnt on Friday that some of China's biggest steel mills have called for an investigation into why the price of iron ore has spiked to unexpected levels. And not surprisingly, BHP's and Rio's share price copped it on Wall Street and in London over our weekend.

BHP is a stock that a lot of us hold and I have to admit I do have a big holding in my portfolio ever since I started pondering on my TV programme — SWITZER — if it was a good idea to buy the miner in 2016 when its share price was in the low $14 region. I didn't have the courage of my convictions until it was in the $15 area but that's my investing way, where I wait for clues that my assessment of a beaten-up, quality company is agreed to by the market. And then I buy.

That said, BHP isn't my typical company as it's not a renowned dividend payer but it has beaten its poor dividend history in recent years, which has been a nice happenstance for me. However, I know I have to lighten off with the company, to buy better dividend payers, especially as I migrate my SMSF portfolio to a more defensive income stance, in case a black swan event comes along to negatively affect my still positive view for stocks.

In a nutshell, I expect an eventual Trump trade deal to help the stock market go up another level. But then I'd expect profit-taking to take the market down before a slower grind higher, interrupted by US electioneering and the run of economic data over 2020.

I expect an economic comeback after the trade deal is struck and there could be another surge, if Donald Trump wins the US poll in November next year. This could easily produce another well-known Santa Claus rally but then I'd worry that 2021 could be the market's biggest chance to really sell off. The first two years of a US presidency are the worst for stocks. By 2021, this bull market would have been up for close on 13 years.

So that's my best guess, if we can rule out a black swan event that could be linked to an escalated Chinese trade war, a real war in the Middle East (starring Iran and the USA), an economic disaster linked to Brexit and the EU. These are all low order worries and I guess you can't rule out a financial system problem linked to the level of debt, historically low interest rates and the spread of silly populist politicians and the willingness of even sillier voters to embrace them.

Interestingly, our election showed the more conservative voter tendency could be re-emerging and even in Greece with a looming election, the wacky Syriza Party looks set to be tipped out of power for the New Democracy Party, headed up by a Harvard graduate son of a former Greek PM. His name is Kyriakos Mitsotakis and his likely election win says the Greeks have had enough of left-wing promising political leaders with rockstar, leather jacket wearing Treasurers.

But that's an aside. The swing to more conservative and economically responsible governments might help the global economic recovery rather than threaten it, which is important for BHP and its share price.

Let's start with what the analysts are thinking about the stock, whose share price has been helped by the tragedy and fallout problems of the dam collapse in Brazil that affected Vale's supply of iron ore. It explains why BHP's, Rio's and Fortescue's share price has surged lately.

Source: Google

As you can see, the current share price is $41.29 and when the news about the dam collapse broke, it was January 2019 and BHP's share price was around $33.

Then in May, Vale warned of possibly another dam could collapse and BHP's share price was then close to $37. It has been a beneficiary of the woes for its big Brazilian rival, so it's no surprise that the forecasted earnings trend is still positive but these are only best guesses and you can see the rise is tailing off, so it's right that many investors are wondering if it's time to lighten off or dump the stock. The answer to these questions depends on how you invest but I will address this later.

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