Key points
- Like Rio Tinto, BHP has concentrated on trying to grow its business in an environment of weak commodity prices, while lifting dividends according to its “progressive” dividend policy.
- NAB’s new management team has impressed the market with how it is dealing with legacy issues, low-returning assets, tackling non-performing loans and (finally) getting out of the UK businesses.
- Former blue-chip Lend Lease is on the long road back to its former status, having participated too eagerly in the over-leveraged property party of the 2000s.
The stock market can be a contrary place: where else can things be up for sale, be highly sought-after and considered good buying, but have their prices slashed by 10% or more – only to see buyers unwilling to buy them cheaper?
That is the counter-intuitive behaviour of the stock market in a correction.
We saw that again last month, when worries about the Chinese stock market spilled over into the developed-world markets, sending major indices slumping by 10% or more – officially in ‘correction’ territory – and many constituent stocks plunging by more.
The reason why many stock market investors don’t treat these occasions as the equivalent of the post-Christmas sales at Myer and David Jones is that negative sentiment overwhelms them, and they worry about further price falls.
History tells us that markets tend to bounce back from corrections, and so do individual stocks. Investors saw the greatest example of this they will likely ever see in 2009, when at the worst of the GFC market crash, they could have bought the likes of Commonwealth Bank for $27.12 (now $72.15) or ANZ for $12.75 (now $26.86) or Westpac for $15.92 (now $29.94). But to buy in early 2009 took courage, as the prevailing mood was extremely pessimistic.
Of course, the GFC crash was an extreme event, with the market losing half of its value before beginning its long recovery.
But the same effect is showing in the market at the moment: high-quality stocks with good business prospects, knocked significantly lower by the August slump. For ‘lower,’ read ‘cheaper.’
Here is a selection of five beaut battered blue chips.
1) Rio Tinto (RIO)
Arguably, you can’t really call a mining stock a blue chip, given that commodity prices are unpredictable. Rio Tinto has still not recovered to anywhere near its pre-GFC high, and as the Chinese economic slowdown put downward pressure on commodity prices, it has been trading sideways since 2011. Rio Tinto is heavily exposed to China through iron ore, which produces the vast bulk of earnings, but it also offers some diversification of global commodities exposure, with gold, copper, titanium, uranium and titanium dioxide.
Although sentiment has been very bearish on iron ore lately, Rio Tinto said last week that it expects total world steel demand to grow by an average of 2.5% a year, with China accounting for a large chunk of that. Rio firmly believes that new iron ore supply will be required, justifying the expansion of its output from the Pilbara.
Rio Tinto lost 14% in the August correction, to a six-year low, and the stock is still down 8.8% from where it fell. At $49.76 it looks attractive buying compared to the analysts’ consensus target price collated by FN Arena, which stands 24% above that. At the current A$/US$ exchange rate, Rio Tinto’s consensus forecast FY16 fully franked dividend yield is 6.7%.
[1]Source: Yahoo!7 Finance, 7 September 2015
2) BHP Billiton (BHP)
Like Rio Tinto, BHP has generated virtually no capital gain for the last five years while commodity prices have struggled, but the stock is a powerhouse in terms of diversified global commodities exposure: having just spun off its “non-core” base metals and (some) coal operations in the form of South 32, BHP is now streamlined down to its core “four pillars” operations of iron ore, copper, coal and petroleum, with potash held as a fifth, future growth option.
BHP lost 8.8% at the trough of the August correction and sits 6.6% lower than from where it fell. The stock is roughly at its lowest point since late 2008. Like Rio Tinto, BHP has concentrated on trying to grow its business in an environment of weak commodity prices, while lifting dividends according to its “progressive” dividend policy and protecting its credit rating. After the South32 divestment, BHP has positioned itself well for a recovery in commodity prices.
BHP’s analysts have a consensus target price that implies an upside of over 20%– and on the current A$/US$ exchange rate, BHP offers a prospective fully franked FY16 dividend yield of 7.5%. Paul Rickard has more on the BHP dividend pledge in his article from last week [2].
[3]Source: Yahoo!7 Finance, 7 September 2015
3) ANZ (ANZ)
The August correction hammered ANZ: the stock is showing a 17.5% slump from its August high. But from the current price of $26.86, analysts see it regaining all of that and more: the consensus target price of $33.68 implies upside of 25.4%. While earnings growth for ANZ is not expected to be stellar either in the current year or in FY16, the bank’s interest margin is stabilising and the core Australasian businesses are performing strongly. The Asian business is under margin pressure, but that is seen to be easing. Adding to the price upside attraction is the consensus fully franked yield expectation, which has risen as the share price has fallen: at $26.86, ANZ is seen as yielding 6.8% in FY15 and 6.9% in FY16.
[4]Source: Yahoo!7 Finance, 7 September 2015
4) National Australia Bank (NAB)
The August-September “sale” on the stock market has seen NAB slashed in price by more than 14%, from $34.77 to $29.60. NAB was the first of the “big four” local banks to bolster its capital ratios with a raising – having tapped the market for $5.5 billion in May – and its new management team has impressed the market with how it is dealing with legacy issues, low-returning assets, tackling non-performing loans and (finally) getting out of the UK businesses.
The analysts’ consensus target price of $35.22 implies juicy upside for the stock, of more than 18%, and NAB is expected to show strong earnings growth (17%-plus on earnings-per-share basis) when it reports for the year to September 2015. In addition, NAB is seen as yielding 6.6% in FY15 and 6.7% in FY16, fully franked.
[5]Source: Yahoo!7 Finance, 7 September 2015
5) Lend Lease (LLC)
Former blue-chip Lend Lease is on the long road back to its former status, having participated too eagerly in the over-leveraged property party of the 2000s. The company has been rebuilt into a global property, infrastructure and construction player, with key investments in US healthcare, Asian urban regeneration projects the Elephant & Castle project in London, Victoria Harbour in Melbourne and the Barangaroo property development in Sydney.
At first sight, Lend Lease’s FY15 result was poor, with net profit down 25%, but last year’s figure was inflated by the sale of the Bluewater shopping centre in the UK. More interesting was the information that the company’s development pipeline rose by 19% to record level of almost $45 billion, with about 70% of that figure represented by urbanisation projects. Also, pre-sold residential revenue more than doubled to $5.2 billion.
The August correction took 15.6% off the Lend Lease share price, but the stock is rated very highly by most of the broking firms/investment banks that cover it, whose opinions distil to an upside of more than 28% from current levels. Augmenting that is an FY16 forecast yield of 4.7%, unfranked.
[6]Source: Yahoo!7 Finance, 7 September 2015
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