There’s been further political theatre in Washington, but I remain strongly of the view that a last minute debt-ceiling deal will be done and the US debt will be kicked further down the road. A lift in the debt ceiling is basically an increase in US dollar money supply, and on that basis it’s no surprise that the US dollar is under pressure and industrial commodities, commodity currencies and precious metals are rallying.
However, the most interesting aspect of this is when US commodity and material companies report earnings, their stocks have been falling. On Tuesday night, 3M lost 5% after reporting, and that follows a 5% fall by Caterpillar after it reported its earnings earlier in the season. Similarly, AK Steel lost 17% and Patriot Coal lost 13% post reporting on Tuesday.
Despite strong commodity prices, there is a clear ‘sell the fact’ response happening in US materials stocks and I feel that trend is coming to the Australian resource sector with expectations high coming into the reporting season. (Note we downgraded RIO earnings by 5% this week).
Our strong view remains that Australian Dollar costs, in both operating and capital expenditures, are being underestimated in the Australian resource sector and that will lead to post-result downgrades to fiscal 2012 numbers for many leading Australian resource stocks. We also see no chance of capital management surprise as the big end of the sector is in merger and acquisition mode again. That is a completely non-consensus view, as is our view that beaten up industrial cyclicals and financials offer greater reporting season upside than resources if they can simply confirm earnings no worse than are, which is already discounted into share prices. Premier Investments’ (ASX:PMV) post profit warning rally of +5% is a classic example of a share price that was already discounting news worse than was actually delivered.
While we’re taking an underweight position on resources, it doesn’t mean we don’t recommend specific stocks with production growth and corporate appeal in resources (such as FMG, AQA, WSA, AWC, PDN, AKM, BDR). It just means that we see greater near-term upside in domestic industrial sectors.
But now, I want to focus on some of our research on sustainable dividend yields. My view is that many of the greatest upside potential stocks post reporting lie in our list of sustainable dividend yield stocks, with beaten up industrials (retailers and financials) dominating all market capitalisation screens. At a strategy level, I recommend being fully invested ahead of the reporting season, with a clear bias to industrials with yield support.
Sustainable yield screen analysis looks to rank a mix of stocks by size, risk, growth, yield and value factors to pick the sectors or stocks that are most likely to maintain yield on a cross sectional basis. The top five at present (excluding Property Trust and Utilities) in the sector screen are Banks, Retailing, Diversified Financials, Software & Services and Materials. The sector to move up the most since last month is Commercial & Professional Services.
The best ten stock ideas with market cap above $350 million after removing property, utilities and infrastructure stocks are listed below.
Best large-cap stock ideas:
- BHP – BHP Billiton Limited
- CBA – Commonwealth Bank of Australia
- ANZ – Australia and New Zealand Banking Group Limited
- WBC – Westpac Banking Corporation
- NAB – National Australia Bank Limited
- MQG – Macquarie Group Limited
- RIO – Rio Tinto Limited
- QBE – QBE Insurance Group Limited
- WOW – Woolworths Limited (Newcomer to the list)
- TLS – Telstra Corporation Limited
Best mid-cap stock ideas:
ILU, FXJ, OST, DOW, MYR, JBH, TTS, CSR, BEN, DJS (Newcomers: JBH and CSR)
Best small-cap stock ideas:
ABY, MGX, MAH, PTM, MND, PAN, MCE, WTF, PBG, IRE (Newcomer: PAN)
Best micro-cap stock ideas:
GDO, MLD, NHF, CNA, MTU, BTT, BRG, CDD, AUB, SLM (Newcomers: MLD and AUB)
Also in Thursday’s Switzer Super Report:
- Is Bega Cheese too tasty?
- The Gold Coast property play – dynamite or dud?
- Don’t get stung by new artworks, collectables rules
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.