Afternoon Report / Markets enters short term ‘tipping point’ (GMA, ILU, A2M, REA, SYR, TRS)

By Market Matters 13 November 17

Markets enters short term ‘tipping point’ (GMA, ILU, A2M, REA, SYR, TRS)

Market Matters Afternoon Report 13th November 2017

The market had a go at selling off on a few occasions today and failed - the buying in the match which saw the index up +8 points from 4pm to 4.10pm highlighting that there was simply a void of sellers in what proved to be a pretty quiet day of trade. Overall, the Material stocks did best, BHP and RIO bucking weakness in their overseas counterparts on Friday, probably a result of higher Iron Ore prices in Asian trade today while most weakness was felt in the IT space – a tight range today of +/- 18 points, a high of 6029, a low of 6010 and a close of 6021,  down -7pts or -0.13%. As we wrote on the AM report, we continue to think a short term pullback seems likely but to date, it’s been stubborn – another example of that today.

ASX 200 Intra-Day Chart – BIG +8pts move in the match

ASX 200 Daily Chart

Not a lot of company news, although a few of the growth stocks presented at a UBS conference and rallied on the back of it – A2 Milk (A2M) - one we hold which said the right things and rallied +3.13% while Syrah (SYR) topped the boards after they talked a very big story – the stock ending +10% higher hurting some of the shorts which are ~21% of their register.

Elsewhere, REA Group (REA) had a volatile day after delivering results on Friday, the mkt digesting over the weekend with moves flowing through today. UBS put it on a sell, our friends at Shaw still have it on a hold (just) however REA management did their best to hose down market expectations around forward growth – the concept that ‘it gets harder from here’ was the undertone of management commentary… Goldman’s on the other hand have maintained the rage on this stock – an $80 price target the most bullish in the mkt. we don’t own REA Group and on 36x we think too much upside is now built in, particularly given it seems their business is now more leveraged to Sydney / Melbourne property mkts which are coming off the boil. The stock closed up +0.32% at $76.41 today.

Genworth (GMA); Staying with the housing theme, and a stock that ‘should’ be struggling is Genworth (GMA), which we have in the Income portfolio. They had another good session today adding +1.95% to close at $3.14, and are now up +12% in the last week or so. As we wrote early last weekish, MQG put out a bullish note on GMA exploding some of the myths around the stock. Anyone looking at GMA superficially would see a declining trend in earnings, big exposure to housing etc which is right, however it’s a capital return story over the coming years…Expect it to range trade and be choppy, delivering a good income along the way.

Genworth (GMA) Daily Chart

Iluka Resources (ILU); Iluka held an investor day Friday with some good commentary on the Titanium Dioxide and Zircon markets that I didn’t get a chance to mention on Friday. Effectively the company saying that both markets have bottomed and turned higher, with most momentum now in Zircon which it the main driver of earnings for ILU. They said there was an ‘emerging supply gap’ which is a positive for prices, they’ve managed to pay down a lot of debt  in recent times and ‘if’ we get the commodity tailwind that has been blowing behind the others of late, we will get a sharply higher SP for ILU.

We like the commodity complex here, we probably sold too prematurely however if history serves as any sort of a guide, opportunities will certainly present themselves in the future – hopefully a few later in November…If we price ILU on 1.1x NPV we get the company worth $11 (versus $9.55) close today, while assuming a commodity price tailwind, 1.5x NPV is realistic which spits out $15. Certainly one to watch for a catalyst after recent consolidation.

Iluka (ILU) Daily Chart

The Reject Shop (TRS) – I was talking about this with a few of the guys on the desk this morning, and it looked interesting. 1. They are repositioning themselves into a niche area, specifically targeted cheap product that cannot be replicated online (think washing detergent and the like). 2. They are becoming specialists is that area and their shops are busy 3. Its cheap (12x) and pays 5.7% FF…and management have proven themselves over the years. It’s an illiquid stock but buying today was pretty aggressive.

Building on our comments from this morning, the retail sector is made up of many different areas - there are things that will not be impacted by AMAZON but have been priced like they will. The mkt hates TRS (still) with a consensus target price of $4.63, and the only bulge bracket to think it’s worth more than $5 is Morgan Stanley with a $5.35 PT. The stock closed up 9.14% today at $5.73.  

The Reject Shop (TRS) Daily Chart

Have a great night

The Market Matters Team

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