Morning Report / Will the Resources Sector mirror the CBA to Westpac rotation? (TWE, CSL, FB US, CBA, WBC, OZL, MIN, FMG, BSL, IGO)

I often quote that “what defines us is how we deal with adversity” and the market certainly gave us a big right cross to recover from yesterday, mining and construction business NRW Holdings (NWH) tumbled -17% after delivering a disappointing half-year profit although we felt the market was too harsh on the stock – I felt like it was Friday when the bell rang yesterday, not Thursday. As I alluded to in the Afternoon Report what irks me the most with this painful move is we’ve discussed selling this position over the last week – MM has stated a number of times that 2021 is the year of the active investor and our tentative selling at times has already cost us dearly but at least we feel this is confirmation of our outlook, MM intends to be more active in 2021 on the stock, sector and index level.

Although the index managed to close slightly positive we actually saw almost 65% of stocks close lower with the classic “yield play” Real Estate & Utilities continue to underperform e.g. sector leaders Goodman Group (GMG) and Transurban (TCL) are down -9.4% and -20% respectively over the last 3-months while the ASX200 has ground higher. Investors who need further proof that stock / sector rotation will rule this year just have to consider that over the same period BHP Group (BHP) and Westpac (WBC) are both up around 30% as elastic bands stretch in all directions.

Australia’s currently embroiled in much publicized battle with Facebook (FB US) which is frustrating some of the 9 million Australians who use the platform daily – I feel in  the minority not being an active user! I tend to agree with Scott Morrison who believes this squabble will ultimately be settled but it may be the start of a global trend against big tech as governments have already decried the apparent influence of social media on the likes of the BREXIT vote and Donald Trump’s election victory back in 2016.

Overnight saw US and European markets drift lower with Energy the standout weakest sector, the SPI futures are calling the ASX200 to open down 0.5% while BHP was up ~20c in the US.

MM remains bullish the ASX200 through 2021 albeit in a volatile manner.

ASX200 Index Chart

The best performer on the main index yesterday was Treasury Wine (TWE) which rallied over 17% following a better than feared half-year result and medium term outlook. As expected revenue declined 23% with reduced shipments to China as the company toils with anti-dumping accusations. However importantly even during these tough trading conditions TWE was able to reduce its debt by over $400m.

This was a classic case of pessimism going too far and an okay result leading to a healthy pop in the stock which we can see following through short-term.

MM is bullish TWE with an initial target ~$13.

Treasury Wine (TWE) Chart

CSL Ltd (CSL) gave the market a healthy nudge yesterday rallying almost $8 / 2.8% after it delivered a mixed but overall net positive result including a almost 17% increase in revenue which flowed down to a 45% increase in NPAT. The company performed well with China and expectedly its flu business booming. MM had been bearish CSL through 2020 we have now adopted a neutral to mildly bullish stance following the stock correction.

MM is neutral to bullish CSL at current levels.

CSL Ltd (CSL) Chart

One move that caught my attention was in the bulk commodity iron ore yesterday as it rallied strongly towards fresh 2021 highs, an advance we’ve been expecting and flagged over recent weeks. The December futures continue to trade in backwardation, around 6% below Mays price but as we saw with Fortescue’s (FMG) bumper dividend yesterday anywhere near current levels turns our major low cost producers into extremely attractive cash cows.

MM is bullish iron ore short-term targeting another 6-8% upside short-term.

Iron ore May Futures (CNY / MT) Chart

Overseas Indices & Markets

US stocks drifted lower overnight as bond yields rallied further dampening enthusiasm for risk assets due to potential rising borrowing costs which took the allure from stocks. Tech was the weakest market pocket following Walmart’s decision to increase spending on workers salaries plus automation adding fuel to the markets concern that inflation is looming on the horizon. However the NASDAQ is still less than 2% below its all-time high, hardly alarm bells territory.

MM remains bullish stocks / risk assets through 2021.

US NASDAQ Index Chart

As mentioned earlier Australia’s currently embroiled in a much publicized battle with Facebook (FB US) which took my thoughts down the ”what if” route for the goliaths future as other countries watch the soap opera unfold down under. Importantly the stocks not priced for massive growth only trading on an Est. P/E of 24x for 2021 and at current levels with potential uncertainty over the years ahead we find ourselves neutral FB seeing no major catalyst to buy at this point in time.

MM is neutral FB at current levels.

Facebook (FB US) Chart

Will the Resources Sector mirror the CBA to Westpac rotation?

As we discussed in yesterday’s Income Report over the last month CBA is down 2% (basically its recent dividend) while Westpac (WBC) has rallied over 14%, investors have moved up the risk curve within the Banking Sector as its recovered stronger than many expected assisted by the economy / housing market post COVID which in turn has led to much lower bad debts than many – the banks and regulators included -  had forecast. All the sector needs is a continuance in the steepening of the yield curve (longer term bond yields rising faster than short dated bond yields) to help margin expansion and they will be well positioned to extend the recent strong performance.

I was pondering overnight whether we may see similar rotation in the Resources Sector as the big names power to fresh multi-year / all-time highs i.e. are we holding the correct stocks to benefit from our reflation view over the next 12-months.

MM remains committed to our view that volatility & rotation will dominate 2021.

Commonwealth Bank (CBA) v Westpac (WBC) Chart

Base metals have broken out to fresh 5-year highs which dovetails with our reflation outlook and while a “rest” now feels like a strong possibility we are very cognisant that the trends bullish and surprises happen with the trend. Hence we don’t want to lose our core position long the sector but we are now considering if some stocks are poised to play performance catch up.

MM remains bullish base metals medium-term.

Bloomberg Base Metals Index Chart

When we consider the respective underlying commodities the trend is similar across the board with copper and nickel leading the charge while zinc and aluminium lag albeit only slightly, we are bullish all of them with no standout after recent gains in copper especially.

MM remains bullish the base metals complex.

Base Metals Comparison Chart

OZ Minerals (OZL) is our most recent purchase in the space and we’re already showing a profit of 14%, we see no reason to sell OZL at this stage but since we switched from Sourth32 (S32) the later has only rallied 4% illustrating the power of correct switching within a sector in today’s active market. Our other 2 holdings in the sector BHP Group (BHP) and Alumina (AWC) have performed very differently in 2021 with BHP up +14% while AWC is disappointingly down 5% throwing up a couple of obvious questions.

MM remains bullish OZ Minerals (OZL).

OZ Minerals (OZL) Chart

Today we have considered 4 stocks that could be putting their hand up as top performers in the months ahead – the hardest part might be selecting a funding vehicle.

1 Minerals Resources (MIN) $38.75.

This iron ore / lithium miner delivered an excellent half-year result earlier this month which as helped propel the stock back towards its 2021 highs. We like this stock for a break towards $42 but in-line with our volatile prognosis for this year I believe there’s a strong possibility MM will have an opportunity to enter in the low $30 region I.e. don’t chase current strength.

MM is bullish MIN short-term initially looking for 8-10% upside.

Minerals Resources (MIN) Chart

2 Fortescue Metals (FMG) $24.88.

FMG has become an awesome yield stock over recent years and this week’s half-year result did nothing to taint the trend, assisted obviously by a clear tailwind from the rally in iron ore prices. They declared a $1.45 dividend which was at the high end of expectations and their targeted payout ratio implying the boards very confident moving forward. The companies on track to yield over 10% fully franked especially while the bulk commodity remains firm. Similarly to MIN we can see a break to fresh 2021 highs but an opportunity to accumulate closer to $20 fells highly likely.

MM is bullish FMG very short-term and neutral medium-term.

Fortescue Metals (FMG) Chart

3 BlueScope Steel (BSL) $18.18.

BSL also delivered some strong numbers this month which led to profit upgrades and the picture is now very similar to both MIN & FMG i.e. we expect fresh 2021 highs in  the weeks ahead but the risk / reward precludes chasing current strength.

MM likes BSL short-term.

BlueScope Steel (BSL) Chart

4 IGO Ltd (IGO) $6.82.

Perth based nickel, copper and gold producer IGO is perfectly positioned for the electric car (EV) evolution plus they recently entered the lithium space. We like this companies long-term strategy and short term profitability, a definite switch candidate for MM.

MM is bullish IGO targeting ~$8.

IGO Ltd (IGO) Chart

Conclusion

Of the first 3 stocks looked at today MM likes all 3 but feel there will be better buying opportunities later this year i.e. we are not chasers of current strength and are more likely to focus on areas to lighten our existing holdings. However the risk / reward with IGO is still attractive under $7.

Have a great Friday,

James & the Market Matters Team

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