Invast Blog

Outlook for resource stocks in 2017

We’ve published a note today to Invast clients on Graincorp shares. The stock has been out of the headlines in the past year after becoming a national talking point when its US takeover was rejected on national interest grounds a few years ago. We focused on Graincorp because the business is at an attractive market cap, has solid infrastructure backing and the new management team has put out some excellent disclosure on its growth plan.

You judge a good management team in the way they handle the bad times, not the good times. When resource and commodity prices are higher, everybody looks like a superstar. When the market turns – as it has over the past two years – the real talent stands out. Graincorp is one of the few mid cap commodity exposures which doesn’t mine minerals or energy. Wheat prices have fallen in line with oil prices, so the market has completely forgotten about this stock. The stock is close to the $8 handle where it has found strong support recently.

Our comments are somewhat reaffirmed by US stock guru Jeremy Grantham this week. He came out and spoke about commodity stocks being undervalued. According to the Australian Financial Review “…Jeremy Grantham sees exciting and unloved commodities stocks heading for what could be a decades-long bull market and claims resources stocks are safer than most investors think they are.

Mr Grantham and his colleague at asset manager GMO, Lucas White, argue that share prices for resources are possibly “unjustified” and “extremely cheap” over the past 18 months.…

GMO doesn’t say that resources are a 12-month bet or name any stocks, it mostly argues that investors should own more resources. Equities are a better source of commodity returns than commodities themselves, and the problems and costs associated with rolling or reinvesting in futures eroded almost all of the return generated at face value, the fund manager finds…”

Grantham’s predictions aren’t perfect. He did incorrectly call the Australian housing market a bubble several years back. Prices have risen steadily since that call, defying many predictions. We do however subscribe to the general narrative that some commodity stocks do have value. Only some. Not all. Sticking to quality is key.

Our exact trading call on Graincorp is only available for Invast clients. If you haven’t yet opened an account, you can self-navigate through our simplified account opening process here. Invast clients will get many more trading updates on resource stocks, in the led up to 2017, over the next few months.

Happy investing,

 

Peter Esho

Chief Market Analyst

Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia.   The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.

Invast Financial Services Pty Ltd (ABN 48 162 400 035) is regulated by the Australian Securities and Investments Commission and holds an AFS Licence 438283 which authorises it to carry on a financial services business in Australia.

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