More extreme action “under the hood” (BKL, GXY, GEM, CTX, SDA, APT)
The ASX200 extended Mondays rally with Australian politics becoming a distant memory while US stocks surging to fresh all-time highs became front and centre. The strength was led by the banks and resources while the energy / telco sectors weighed on the index which impressively managed to close back above the psychological 6300 level. Our market has simply remained range bound between 6200 and 6350 for the last 2-months, no need to push views at this stage.
The volatility on the individual company level was again massive within the ASX200 as 7 stocks rallied by over 5% while 4 stocks feel by over the same benchmark i.e. over 5.5% of the ASX200 moved by over 5% on a day when the index itself rallied by less than +0.6% - that’s volatility.
· We are now neutral the ASX200 but remain in careful “sell mode”.
Overnight stocks were very quiet with the only activity actually catching our eye being an aggressive sell-off in gold ETF’s as the precious metal slipped back under $US1200/oz – we’ve touched on this below.
Today’s report is going to focus on 6 stocks which moved over 5% yesterday as “surprises” are springing out like the cherry blossom over recent weeks in Sydney!
ASX200 Chart
Gold ETF’s fell by almost 2% last night making fresh 2 ½ year lows. The picture is not particularly exciting for now but we would be very keen buyers of a break below 2016 lows.
We will be watching closely how the gold sector performs today with particular attention on Newcrest (NCM) which we own in the Growth Portfolio.
Gold ETF
Winners
We have signalled out 3 of the top 7 performers from yesterday although they do also encompass 2 other sector / sentiment related stocks.
1 Blackmores (BKL) $162
BKL surged by +11.5% yesterday following its annual results which showed a 19% increase in net profit after tax (NPAT) to $70m while declaring a dividend of $1.55. Sales growth of 22% in China was the highlight of the numbers assisted by excellent performance on-line as hoped due to its affiliation with Alibaba.
The company gave no real guidance however the momentum in Q4 was strong while the newish CEO Richard Henfrey excited the market with an upbeat outlook – “The Board shares my confidence in our ability to continue to deliver sales and profit growth in the coming year.”
· MM has turned around on BKL and likes the stock targeting ~$200 while it can hold above $150 i.e. excellent 3:1 risk / reward.
Also, Bellamy’s (BAL) rallied almost 8% as it garnered confidence from BKL ahead of its numbers today, all things being equal we prefer Blackmores at time of writing.
Blackmores (BKL) Chart
2 Galaxy Resources (GXY) $2.93
GXY rallied +5.8% yesterday although the stock was up well over +10% earlier in the day. The lithium producer rallied following the announcement that South Korean conglomerate POSCO has purchased a package of tenements from GXY in Argentina for a cash consideration of US$280 million.
While the cash clearly helps GXY the potential for the two companies to work together is also a large positive influence on the stock. However even after yesterday’s rally the stock is trading 35% below the years high as concerns around the medium / long term health of the lithium price continue.
· MM is neutral both GXY, and the lithium sector, at this point in time.
Other major lithium player Orocobre (ORE) also rallied over 5% on the day following a strong result including a NPAT of $US25.7m. The stock remains one of the lowest cost producers enjoying a margin of 67%. Similar to GXY the future is all about the lithium price and the shorts are voting strongly that the price will fall hard as they fill 2 of the 4 most shorted stocks on our bourse – we are neutral for now.
The next catalyst for the sector may come from Mineral Resources (MIN) if they attract a strong price for a 49% stake in their Wodgina Lithium project.
Galaxy Resources (GXY) Chart
3 G8 education (GEM) $2.93
GEM rallied +5.5% yesterday but this was only a bounce following the previous days 16% fall on the back of a very poor result including a reduced dividend. GEM is a stock we’ve looked at numerous times for the MM Income Portfolio however weak occupancy trends and rising compliance costs have kept us rightly on the sidelines. With the stock on a PE of 10.8x for next year, it’s clearly cheap, however the stability of the 7%+ yield remains the concern.
Blended Forward P/E - GEM
· At this stage, MM is neutral GEM and sees no reason to catch this falling knife.
G8 education (GEM) Chart
Losers
1 Caltex (CTX) $30.68
CTX tumbled -7.9% yesterday following its first half numbers with the combination of a dividend cut and lack of clear near term growth weighing on the stock.
· MM remains bearish CTX with a target ~8-10% lower.
Caltex (CTX) Chart
2 SpeedCast International (SDA) $4.20
SDA plummeted over - 37% yesterday illustrating the risks of the high growth / valuation stocks.
The result itself appeared ok with revenue up 24% and NPATA up close to 40% to US21.1m.
As is often the case it was not the numbers but the company’s outlook which caused the move, in this case down – it guided to EBITDA around 10% lower.
When growth stocks are priced “for perfection” the outcome can be devastating when the company just coughs!
· MM is neutral SDA but a bounce would not surprise.
SpeedCast International (SDA) Chart
3 Afterpay Touch Group (APT) $19.95
APT fell -5.6% yesterday as the volatile ride continues. The stock has been a phenomenal performer in 2018 but we feel investors now need to prepare for some major swings as we wait to see if the company can capture the anticipated US market share.
The stock corrected ~15% from its all-time high last week, for investors looking to buy APT we would currently be targeting the $18 area.
· MM is neutral APT and expects some choppy consolidation in the weeks ahead.
Afterpay Touch Group (APT) Chart
Conclusion
We have divided the 6 stocks we covered today into 3 obvious groups:
Bullish – Blackmores (BXL).
Neutral – Galaxy (GXY), G8 Education (GEM), SeedCast (SDA) and Afterpay (APT).
Bearish – Caltex (CTX).
Overseas Indices
The US S&P500 has hit our 2900 target but no sell signals have been generated, we believe that September / October may be extremely exciting times.
US S&P500 Chart
The recovery by the UK FTSE back above 7600 is slowly but surely switching us more neutral.
UK FTSE Chart
Overnight Market Matters Wrap
· The US major indices closed marginally higher overnight as investors weigh their positions following all majors at, or near its all-time highs.
· US economic data was also a positive, with its consumer confidence in August reporting its highest in 18 years… could this re rate investors’ thoughts of an interest rate rise at a faster pace?
· BHP is expected to outperform the domestic market today, after ending its US session up an equivalent of 0.71% from Australia’s previous close.
· Domestic earnings expected to report today are BAL, BGA, BLD, IGO, SRX & VAH. While MTS is due for their AGM.
· The September SPI Futures is indicating the ASX 200 to open marginally lower testing the 6300 level this morning.
Have a great day!
James & the Market Matters Team
Disclosure
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.
Disclaimer
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