As the Australian market looks like it is getting ready for a more of the Santa Rally, which stocks are likely to be a potential gift-wrapped Christmas Present of profit?
The Australian Stock market has had few friends in the second half of this year. The ongoing slide from April’s high has weighed heavily, as we have seen from the performance in the mining sector and even former safer havens like Woolworths (ASX: WOW).
However, not all stocks are the same!
CBA has been an interesting stock to be in, I should know, I am in it, and 2015 has been a very different year, in terms of the stock’s performance. Case in point, back in August around its dividend time, CBA would ordinarily expect to move up, as investors hunting for the dividend, pile into the shares.
Not this year, in fact, the stock slid away, and continued to, post dividend, weighed down by Chinese impact on the outlook for the Australian economy.
However, unlike the mining sector, CBA has found great support, with $72 and $75 forming the bulk of its Sept/October Trading range. Now with the stock back above $80, a short term target of $85 looks very possible.
Naturally, trading and investing does involve risk and past performance is no guarantee of future performance. Given that Australian stock investors starved of positive news, don’t be surprised to see CBA delivering the goods again this year.
The Huge Difference is the nature of the sell off…
Hang on, a sell off is when the price falls, right?
Well yes and no – in fact not all sell offs are the same. In the case of the broad market, the sell off brought P/E’s or valuations back from higher to fairer value – in other words the stock became better value. CBA for example.
Without getting into the “mumbo-jumbo” of financial ratio analysis, P/E can be simply considered as the amount of money an investor will pay for a dollar of earnings. For example at 15.1x an investors is paying $15.10 for $1 of earnings.
By contrast, looking at the mining sector, this has not been a revaluation, this has been an earnings driven fall. This is far more serious – Big Problem.
These two words you never want to hear used when talking about an investment and very specifically a blue chip that you may be holding in your portfolio.
So why such a big problem in the mining sector?
Well it is very hard to see commodity prices rising, at least materially, in the current World Economy. China’s consumption has slowed, prices have followed, however, the new supply whiplash – that is new mines and production facilities coming on stream are adding to supply, and is the opposite of what’s needed for prices to be rising.
This is a big problem as there are few, if any, catalysts for earning growth in the mining space. Hence this is far more serious than a revaluation and reset, for that sector. See our recent BHP article for more information on this. To a more normal level.
Back to the Opportunity…
Investors’ money simply has to flow somewhere, as holding cash is really not an option, particularly after tax and inflation. What’s more other areas of the stock market have been weak, but of more concern is the outlook, for these areas – and there looks like no end to the pain.
In essence, this article illustrates the importance of not lumping all stocks in the same basket. Just because things have been challenging for the resources sector, there will be beneficiaries and CBA is likely to be front and centre in that depositary for investor funds – not just in its accounts, but more likely in its shares.
For some, Christmas will come early as they rotate funds into what’s hot, yet others will be dealing with a mining sector created hangover, which will be no fun. The question for you is how do you want to be feeling?