3 stocks that are still on our radar & one mild concern

Nicholas Forsyth

Market Matters

After a stellar 3 week rally, of over 7%, a short rest around this 5400 area would not surprise, and this may produce the opportunity to enter some of the stocks we like on a risk / reward basis. Yesterday we discussed South32 and then it fell 4.5% $1.88 - watch for alerts under $1.85 which looks highly likely as BHP closed down 70c in the US.

ASX200 Weekly Chart


Today we will consider 3 stocks that we have mentioned previously which are very much on our radar and  importantly they are now presenting good risk / reward opportunities. Also, we will evaluate our position in Graincorp (GNC) which is currently struggling to produce returns.

QBE Insurance (QBE) $10.73

QBE fits our profile of an underperformer having fallen 27% for the year compared to the ASX200, which is down 4%, and the insurance sector which is up over 2%, primarily aided by an impressive performance from Medibank (MPL). QBE has been hurt by two macro scenarios over recent times and a very weak environment for commercial insurance premiums, all of which impacts its profitability.


1. Interest rates continuing to fall is painful for QBE who hold their premiums in US fixed interest – lower yields = lower returns from their free float

2. The Australian dollar has rallied 10c in 2016; again QBE earns income in $US hence the company experiences deteriorating earnings on a strong $A. Interestingly, the AUD did fall overnight and is down around 1c since the RBA minutes were released yesterday. The market is now pricing a 66% chance of an interest rate cut in Australia at the start of August, which if it happens, is likely to put further pressure on the currency.  


Bigger picture our view remains that it’s a question of when, not if,  global interest rates rise and the $A continues to trend down. The recent rally from 68c still looks like a short term bounce rather than a change of trend, so right now, these factors may be producing an opportunity in QBE.

Aggressive players can buy QBE with stops under $10.50.

NB Market Matters already has exposure to the sector through Suncorp hence a purchase for ourselves would be very aggressive and unlikely at this stage.

QBE Insurance Monthly Chart


 

Fortescue Metals (FMG) $4.06

FMG has enjoyed a magnificent rally in 2016 but weakness today under $4 will be over a 10% correction from the recent high.  We remain positive the Emerging Markets Index for 2016 which is very correlated to the Australian resources space. Fundamentally we like FMG as they continue to pay down debt, generate high levels of free cash flow and have fairly spectacularly cut its cost base.

To give some context, on last production numbers they had a C1 cost base, which excludes corporate overheads, debt & capex (simply the cost of digging the stuff out of the ground) at US$14.76 with a target of sub $US13.00 for the June Quarter – which they report next Wednesday (27th July). A few years ago this number was above US$40.

We are buyers under $4 and would add to the position around $3.60 however as always, wait for alerts.

Fortescue Metals (FMG) Daily Chart

 

Newcrest Mining (NCM) $24.13

As discussed regularly the gold sector remains one of our preferred vehicles for 2016/7, but obviously, it's a volatile space which can be used to investors advantage. Newcrest has now corrected 11.3% and Regis Resources (RRL) 7.3%.

We are buyers of NCM under $24 and would add around $22, with RRL we are initially buyers around $3.60. Our allocation of capital will be dependent on which stock looks the most attractive at the time

Newcrest Mining (NCM) Monthly Chart

 

Graincorp (GNC) $8.59

Market Matters has a 5% weighting in Graincorp (GNC) from around $8.75, we are currently down under 2%, but our concern is the lack of performance in a strong market, which is a sign of underlying weakness. The longer term technical picture remains OK, but our consideration is;  would the funds be better employed elsewhere?

 

Graincorp (GNC) Monthly Chart


 
Summary

  • At current levels with like QBE (stops under $10.50), FMG plus the gold sector both with a view to adding on further weakness.
  • Firing all one's ammunition into resource stocks into the current pullback is very aggressive as they regularly extend in both corrections and rallies.
  • We are considering our GNC position very carefully and whether capital would be better deployed elsewhere.

 

Watch for alerts over the days/weeks ahead.

Overnight Market Matters Wrap

  • The US markets closed mixed last night with the Dow climbing for a 6th day in succession into record territory; up 26 points (+0.14%) to 18,559, while the S&P500 slipped slightly lower, down 3 points to 2,164.
  • Once again there was weakness in oil with the price dropping 59c (-1.3%) to US$44.65/bbl. The oversupply issue last night was tempered somewhat by a report that a protest shut down a Libyan operator, suspending production of 100,000 barrels per day.
  • Iron Ore continued to weaken last night, which will not help our miners this morning. The price fell 84c (-1.5%) to US$56.02/t. BHP in the US closed down 5% to an equivalent of A$19.12 and RIO dropped 5.5%.
  • Despite potential weakness, the September SPI Futures is indicating the ASX 200 will open higher this morning, around 13 points, to around the 5,465 level.

 

Disclaimer
All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 20/07/2016. 9:00AM.
 
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