Income Report / Income Report: Should we buy resources for yield? (BHP, TCL, GMA)

By Market Matters 11 December 19

Income Report: Should we buy resources for yield? (BHP, TCL, GMA)

Market Matters Income Report 11th December 2019

The market has seen some buying this morning, trading around 0.4% higher at the time of writing (10.30AM). 9 of the 10 biggest stocks by market cap are in the black with Macquarie (MQG) the only detractor. Resources are generally trading better with gold, iron ore and base metals all doing well overnight. Energy is also climbing with crude continuing to rally post the OPEC meeting last week. Tech and REITs are trading lower – CMA’s capital raise, and now CIP tapping the market, putting pressure on the real estate names this morning.

Overall, the ASX 200 is currently trading up +21pts or +0.32% to 6728.

ASX 200 Chart

The Income Portfolio was marginally higher during the week, adding 0.08% which was in line with the ASX200 Accumulation index which traded up 0.07%. There was little change across the portfolio with Ive Group (IGL) the biggest mover in either direction by adding 2.67%. Distributions were paid by CBAPF, CBAPG and NABPF. The portfolio continues to track above the benchmarks, currently up +3.00% financial year to date, versus its absolute return benchmark of +2.17%. Since inception the portfolio is up +19.97% vs the benchmark of +13.09%

Should we buy resources for yield!

There is a saying in the market that we should never buy resources for yield, and there’s a lot of validity in that view for a buy and hold sort of investor. Commodity prices are cyclical and therefore resource company earnings are equally as volatile. The other interesting saying applicable to the sector is that we should buy them on a high P/E and sell them on a low P/E, the inverse of what would normally be true. High P/E’s generally mean earnings are weak because commodity prices are low, and vice versa – which makes sense given their cyclicality. Buy at the bottom of the cycle and sell at the top.

However, markets are dynamic and having an open mind and a more active mindset is also a mantra we live by. We currently hold BHP in the MM Platinum Portfolio and today we’re adding it to the MM Income Portfolio.

BHP Billiton (BHP) trades on an Est P/E of 13x for FY20 while the projected yield for the next 12 months is 5.34% fully franked, with the stock trading ex-dividend in March.

As per comments in the morning note today, there are a number of tailwinds from a macro standpoint that support our bullish commodities call.

  1. Global bond yields are ‘looking for a low’. Higher bond yields are bullish for resources
  2. The strength in the $US since the GFC is showing signs of faltering. A weaker US currency is bullish for commodities
  3. Emerging markets are turning more bullish which have a positive correlation to resource stocks

MM is bullish BHP adding it the MM Income Portfolio with a 4% weighting

BHP Billiton (BHP) Chart

Why we’re wrong to hold Transurban (TCL)

Part of managing a portfolio is continually reassessing holdings and today we feel uncomfortable about our position in Transurban (TCL). This is a high quality toll road operator that continues to do well operationally and the share price is reflective of that, however that’s not the only reason it’s rallied – interest rates are also very important. While we doubt interest rates will rise sharply anytime soon, the tailwind of falling yields in our view has passed.

US yields continued to edge higher over the last week as we now believe that US rates are very close or may have even seen a low.

US 10-year bond yield Chart

As bond yields stabilise and potentially edge higher, Transurban (TCL) will likely struggle

We are cutting our holding in Transurban (TCL) from the MM Income Portfolio for a small profit

Transurban (TCL) Chart

Genworth (GMA) $3.70

On the 6th November we covered mortgage insurer Genworth and today its worth re-visiting for further clarification. At the time MM wrote.. We had a question about running stops in the Monday morning report this week and today we have a practical example of how we would run this strategy. Mortgage Insurer GMA has been in a strong trend for the past year and our position is showing a paper profit of more than 50%. While the technical trend in this stock is strong, when looking at the WBC result on Monday one issue shone through, that being 90 day past due home loans increased from $3.1B at 30/9/18 to $3.4B at 31/3/19 and to $3.8B at 30/9/19. The 1H19 bad debt charge was $333M and there were $428M in net losses. These trends are negative for a business like GMA.

The previous high in GMA was $3.79 so technically, the stock should not pullback and close below that level. We are therefore running stops on a close below $3.73 to give a margin of safety.

While GMA is currently trading at $3.70 it has been as low as $3.60 on a close basis, however on the 13th November it went ex-dividend for a large 24.2c. This means, a stop on a close below $3.45 would now be applied  

Genworth (GMA) Chart

CVC Credit Fund (proposed new listing)

There was a question on Monday regarding a new listing from the private equity specialist CVC, and we didn’t have time to cover. From what we understand, the deal has not been finalised as yet, and it hasn’t been launched. Our understanding is it will likely be similar to what KKR launched recently which trades under code KKC. We covered this in the note last week – click hereUltimately, we did not participate in this listing having a preference for a more targeted approach.

The other aspect here is that we’re starting to see too many of these type of offerings – Listed Investment Trusts (LITs) targeting alternative assets / stable income and its having an impact on the market. KKC for instance upscaled their offer due to demand, yet KKC has never traded above the issue price of $2.50 and now finds itself at $2.43. One of the obvious concerns is around a listed / liquid structures being given to often illiquid assets - it’s always important to understand the actual underlying assets of a vehicle like this.

MM remains neutral (at best) on KKC & will review CVC if / when it comes to market.

AMP Hybrid $100 (lists on 24th December)

This was a recent offer we covered recently in a note titled,  Why we’re adding the new AMP Hybrid to the Income Portfolio – click here.  

MM is positive on the recent AMP Hybrid, adding it to the Income Portfolio with a 5% weighting


We are bullish BHP adding it to the income portfolio
We are bearish Transurban (TCL) cutting it from the income portfolio
We are adding the new AMP Hybrid to the portfolio

Have a great day!

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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