Invast Blog

BHP Still Too Expensive

Firstly, I would like to wish all our readers a Happy Easter holiday. I hope you had a lovely time with your family and loved ones. I couldn’t help stay away from my computer over the holiday period, casting an eye over the market and Australian stocks in particular. I sat down and had a long chat with the Invast sales team over the past two weeks and specifically before the holiday period. There is overwhelming feedback from many traders for more insights into Australian stocks. Because of this, I’ll be covering the top 80 Australian listed companies throughout the month of April in our Invast Insights reports.

Please make sure you continue to send feedback through on what topics you would like the research team to cover. We value this very much.

The overall direction of the Australian stock market has been a function of one question – where is BHP heading? Our major bull markets have been resource driven and BHP Billiton has been the heavyweight driver. It is in that context that I spent a bit of time over the Easter break looking at BHP specifically. I don’t like what I see.

I have made no secret of the fact that BHP is a stock to be avoided since the beginning of the year. In fact even earlier, we wrote about it as part of our top 5 themes for 2015 in December last year.  In late January I published a post on the Invast blog titled “Prospect for BHP Shares in 2015” In that note I wrote “We think buying BHP on value is somewhat of a trap because the full extent of the slump in iron ore and energy prices has yet to be taken through BHP’s balance sheet…”

Since then, the iron ore price has continued to slump, oil prices have recovered slightly but not in a meaningful way, base metals are at depressed levels and coal prices have barely moved out of their downward spiral. BHP is diversified but still very much exposed to energy and iron ore. Both are at very depressed levels. It is with great surprise that I still see BHP shares at the $30 per share range. Perhaps the fall in the A$ against the US$ explains some of the action. As the A$ falls, BHP shares become cheaper in US$. Still that’s not a good enough excuse for Australian traders.

Based on what we’re seeing in commodity prices at the moment, BHP should be in the mid to low $20s. That’s where I will start to put my contrarian hat on and look for a medium term entry prices. Until then, I think it is still very expensive and the full impact of falling iron ore and energy prices are yet to be completely reflected in BHP’s balance sheet. There is an argument in the market that BHP is still generating a decent cash margin on its iron ore sales. To me margins mean nothing, the value of a share is a function of its return on investment and BHP like many other Pilbara iron ore producers poured huge amounts of money into expanding its infrastructure over the past decade, only to see the return on investment diminish.

As Amazon CEO Jeff Bezos says, margins mean nothing, it’s all about free cashflow and return on investment.

The blog posts I publish on a weekly basis, like this one, are only a small part of Invast’s complete research offering. There is a lot more detail in Invast Insights reports, which I spend a lot of time on and publish every single week. In April we will be going through the top 80 stocks listed on the Australian market. If you don’t receive Invast Insights, you can subscribe to a trial here at We’ll recap this all in our end of month webinar.

These are our initial impressions only, please make sure you always read all disclaimers on this website and individual reports very carefully. If you have any questions, please contact Invast staff at 1800-468-278 (or +61 2 8036-7555 international).

Happy trading!

Peter Esho
Editor – Invast Insights

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