Morning Report / Subscribers questions (OZL, IGO, SHM, TSLA US, CSL, NCM, WPL, Z1P, A2M, PPT, MOC)

No major market news over the weekend as the COVID vaccine is rolled out from today in Australia, hopefully meaning no more state lockdowns, tennis remained the main topic of conversation both in the press and in our household and it was a bit of an anticlimax I’ve got to say! The ASX200 feels like its “wobbling” around the 6800 area but as we discussed in the Weekend Report all the actions unfolding beneath the hood. So far in 2021 the sectors catching my eye in 2021 are:

1 – The Banks, Food stocks, Resources, Media are hot.

2 – The Fund Managers, Golds, Real Estate & Utilities are cold.

However while trends usually last longer than anticipated eventually they do revert and this year we expect volatility will be the name of the game hence the list above is likely to become jumbled a few times in the months ahead. The winners above do dovetail with our reflation view but as more investors board the train a sharp pullback becomes more likely hence we are reticent chasing strength in many market pockets i.e. buy weakness and sell strength has paid off in many instances already this year and we believe this is one trend that will be maintained.

The Bank of Queensland (BOQ) will be interesting this week and it should give us an updated read through on the strong Banking Sector after it successfully raised $1.3bn at $7.35 to buy ME Bank – last trade was $8.41. My feeling is any dip under $8 will provide a good buying opportunity into the regional bank.

MM remains bullish Australian stocks through 2021.

ASX200 Index Chart

We regularly discuss reflation at MM but with more of an eye on the likes of base metals and crude oil, the chart below includes all commodities from coffee to sugar and corn, the picture is clearly the same with a 30% appreciation over recent months. As commodity prices rise so by definition will the cost of goods and hence inflation, if / when wages joins the party we expect an acceleration higher.

MM is bullish commodities.

CRB Index All Commodities Index Chart

Thanks again for the much appreciated questions, a really exciting volume plus as always some really interesting thoughts:

Question 1

“Hi James, I have just received the notice from Macquarie Bank, informing me of the launch of the new hybrid MCN5 (MQGPF). If I have not mistaken, the offered distribution rate is 2.5702 % and 40% franked. Under the present positive share activities, this seems hardly worth it. What do you think? Thanks and regards Gregory C.

Morning Gregory,

I anticipate many more questions around yield ideas throughout 2021.  The new Macquarie hybrid is the smallest margin (2.9% over bank bills) I’ve seen from a Macquarie issue and it’s close to the lowest rate offered by CBA when they issued the CBAPD a few years ago at 2.7% over - that proved to be the top of the market (bottom in yields) for a few years. While MM is not saying this is the top of the market for hybrids, it is a very tight yield for a Macquarie note and highlights the demand for yield and the weight of money in the system. The broader hybrid market is trading on similar rates to this new issue, the latest Westpac note (WBCPJ) is trading on a margin of 2.87% over bank bills based on its closing price of $104.45, and given the lower level of risk in WBC versus MQG, MM prefers the WBCPJ to the MQGPE.

MM prefers the currently listed WBCPJ around $104.45 over the new MQGPE.

Australian 3-year Bond Yield  Chart

Question 2

“Hi Guys, nice calls over the past months however a bit slow on changes. It looks like the long “holds” are over with rotation the new normal. I would like to know your thoughts on the “go to” gold sector which now seems a thing of the past with Tech stocks looking like to “go to and get out” sector for more short term growth. My feel is we have missed a lot of opportunity by holding rather than a more “in and out” or if you like short term position(s). Materials have hit highs, as have the banks so what next? Good work team but time for change I feel.” - Wayne S.

Morning Wayne,

I assume you’ve felt our frustration over the last few weeks around being too slow to sell and switching out of banks / resources is undoubtedly the easiest path to follow at present. However our core reflation outlook for 2021 / 22 suggests both sectors should outperform and while the “easy money” has gone as stocks like OZ Minerals (OZL) hit fresh multi-year highs, the question now is do they again accelerate higher or is it time for a rest. We are watching very carefully but the chart of copper below is actually implying the later.

MM are not convinced its time to take profit from the banks & resources.

OZ Minerals (OZL) Chart

Copper March Futures ($US/lb) Chart

Question 3

“Hi, I’m really enjoying being part of market matters and since joining I’ve added OZL, A2M, ALL, VUK. I notice you covered IGO since falling in recent times is this something I could buy to add to my growth portfolio” - Kind regards Adam A.

Morning Adam,

Welcome onboard. MM hasn’t purchased IGO primarily because we only have 2% in cash! This business is evolving into a nickel, copper and lithium play which we believe is a case of “right place at the right time” entry levels are the primary focus to us. We like the stock especially into any weakness under $6.50.

MM can see ourselves buying IGO in 2021.

IGO Ltd (IGO) Chart

Question 4

“ Hi James and Team. Thanks for your ongoing commentary - very helpful. Just looking for a view on a small cap , SHM, It receives little coverage and research but it’s business model is a little like Breville, It looks quite cheap to me. Any commentary that you are able to provide on a fundamental or technical view would be appreciated” - Thanks / Cheers David P. 

Morning David,

Shiro Holdings (SHM) is a $99m NSW company which sells kitchen appliances and consumer products, indeed operating in a similar space to the $4.2bn Breville Group (BRG) which trades on a significantly higher valuation, we feel this is probably justified due to its ongoing growth prospects. SHM owns brands like Omega and Robinhood in Australia and New Zealand while also distributing the likes of Casio and Blanco, the trouble is it’s hard to mirror the expansion into the US that BRG has enjoyed. As a stand alone business we like SHM and the more goals it can kick locally the more investors’ attention it will enjoy.

MM likes SHM and feels its cheap and yields extremely well – a quality small cap.

Shiro Holdings (SHM) Chart

Question 5

“Hi James & Team, would appreciate your advice on the following:  1) Your comment on why GGG fell like a rock after recent raising capital at 26.5 cents? 2) Is there an ETF on EV without TSLA in its portfolio?” - Many thanks, Sidney H.

Morning Sidney,

1 – Greenland Minerals (GGG) is a $215m uranium and rare earths explorer / developer, this is an extremely volatile space and after its $30m cap raise at 24c the markets clearly lost confidence in the business for the foreseeable future as the stock closed at 16c on Friday, as I said this is a sector where stocks double and half almost monthly.

2 – EV sales are expected to reach 12 million in 2025 and 24 million in 2030 hence it’s easy to comprehend your interest in the sector. I’m not aware of an ETF that doesn’t have exposure to leading market player Tesla (TSLA US), if you have an aversion to Elon Musk’s goliath perhaps consider a portfolio of alternative individual players with a number currently surfacing in China.

Tesla Inc (TSLA US) Chart

Question 6

“Does MM consider CSL a buy at $274?” - Chris G.

Hi Chris,

MM is no longer particularly bearish CSL as we were through 2020 but our real feel at current levels is neutral, the stocks trading on ~35% premium to the ASX and with growth becoming harder by the year this might still be on the rich side. Ideally MM would like to accumulate CSL under $260, only 5% lower. This is undoubtedly  a quality business where entry price is the main consideration at present.

MM is neutral CSL.

CSL Ltd (CSL) Chart

Question 7

“James. I am interested in your opinion on the direction of gold and the share price of Australian gold miners. Production, profits, cash in bank all up, and likely to stay so into the next half, yet due to the negative direction of the gold price their share prices are floundering. Will inflation bring a bounce? Are they still worth holding as a hedge against the inflated market? Is patience required? Or, is it time to sell out (at a loss in NCM and GOR for me) and put the funds elsewhere?” – thanks Charlie N.

Morning Charlie,

There isn’t a day goes by that I don’t ask myself the same question with Newcrest (NCM), it feels like a ball and chain hanging off our Growth Portfolio. At the moment we are being patient with NCM but its most definitely on our watch list to jettison for a loss. Fortunately we believe the company is kicking some goals operationally hence its likely to bounce well when the sector finally enjoys a bid – NCM has fallen 37% while gold has fallen 14% in $US terms and more basis the $A.

Also it’s important we remind ourselves that we expect plenty of volatility under the hood in 2021 which should at least mean the precious metal stocks enjoy a bounce i.e. MM is being patient towards NCM for now.

Newcrest Mining (NCM) Chart

Question 8

“Hi James and team, Thanks for the reports. What’s your thoughts on BPT and WPL? GS are much more optimistic about WPL than BPT. Would you agree? I missed the boat on OZL this week when you pivoted there? Would you recommend OZL or NCM given the OZL rally this week, and NCM retreating?” - Regards Alan P.

Morning Alan,

1 – We prefer BPT over WPL as we are bullish crude oil and it’s a more leveraged play but both are disappointing at present as they fail to embrace the ongoing strength in the underlying commodity. On a standalone basis we feel WPL is great buying ~$22.

2 – After recent moves I wouldn’t be chasing strength in OZL as we alluded to earlier and with NCM I would like to see a clear signal that a bottom’s in place, at least while it continues to grind lower.

Woodside Petroleum (WPL) Chart

Question 9

“Hi James and team, I realize that other subscribers have asked but want to know when the emerging companies portfolio will come out? There have been a few teasers with RHP, BAP, ABY, WZR and a few others mentioned I think but would love to some sort of list sooner than later – just nervous it will come out and all those stocks will have moved!” – Thanks, Cameron F.

Morning Cameron,

I hear you! The US small cap index the Russell 2000 shown below illustrates how strong the small cap stocks have been over the last 9-months, its more than doubled significantly outperforming the broad market as it revels in the low interest rate environment. We do feel the index is definitely due a rest and fingers crossed we will launch at an opportune time in the not too distant future.

MM is bullish the Russell 2000.

Russell 2000 Index Chart

Question 10

“Dear James, On 30 NOV 2020 you were saying there was an overhang on Z1P shares – 5% coming out of escrow and Westpac selling its $467milio stake, what is the status quo now?” Thanks Indran.

Morning Indran,

We believe the determining factor in the status quo dynamic of Z1P at this point in time is the fairly aggressive short-covering that’s seen its short position basically halve from Januarys level above 8%. This unrelenting buying, which probably was aided by the GameStop surge in the US, is likely to plateau in the coming weeks and the company will then need to kick some further operational  goals to push the stock to fresh all-time highs.

MM is bullish Z1P but will consider taking some profits above $15.

Zip Co Ltd (Z1P) Chart

Question 11

“Hi Guys, out of curiosity wouldn't it be prudent to wait for results. Unless there something we are all missing.” – Regards Frank M.

Morning Frank,

All comes down to why we / you feel a stock looks attractive, we could argue that if we waited for a company to report before we went long shouldn’t we similarly close out all of our existing holdings before such company’s report? However if we do go long a company prior to its report we do steer away from stocks that enter the “ confession arena” with huge expectations, these often see a good result fail to send shares higher – “buy on rumour sell on fact”.

MM is now bullish A2M into its result.

a2 Milk (A2M) Chart

Question 12

“No CRYSTAL ball stuff but in your humble opinion are Perpetual and MORTGAGE choice oversold after today's results Many Thanks” – Warren W.

Morning Warren,

1 – Perpetual (PPT) is in a sector that’s struggling at present even while stock markets advance hence we see no reason to chase PPT at present.

Perpetual (PPT) Chart

2 – Conversely MOC does look interesting on a risk / reward basis on an accumulation basis, it pays a great dividend that should become supportive sooner rather than later i.e. over 5% fully franked. 

Mortgage Choice (MOC) Chart

Have a great day,

James & the Market Matters Team


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