Amcor and Sims Metal the best of a boring bunch

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In my last review of the non-mining stocks in the materials sector (7 December 2012), I was lukewarm about all of these stocks. Essentially, none of them is big enough to challenge their mining counterparts for a place to represent the materials sector as high-conviction stocks – and none seemed likely to add some spice as smaller cap stocks. I favoured Amcor (international packaging) over Orica (chemicals and explosives). I did not like the steel companies due to their seeming dependence on government support.

As it turns out from Table 1, Bluescope Steel (44%) did very well and Amcor (21.2%) put in a credible effort. The materials sector as a whole did very poorly (-14.3%) because of the problem that faced the mining stocks. If we compare the capital gains in Table 1 to the gain of 4.6% for the ASX 200 over the same period, four stocks of the top 100 (Bluescope, Amcor, Alumina and James Hardie) and two small cap stocks (Dulux and Fletcher Building) beat the ASX 200.

The current consensus recommendations for Amcor are still just outside of our comfort zone of a 2.5 (for an overweight call on a scale of 1 for a buy to 5 for a sell) but the recent falls in the dollar and the growing strength of the US may help AMC in coming months. Orica is still out of favour with me, even though its rating has improved substantially. I would like to see it stay a bit better than 2.5 for a while longer.

The recommendation of Sims Metal (SGM) has strengthened to a 2.00 from a 2.38 and continues to attract my interest but not yet my funds.

Turning to Table 2, the materials sector remains very underpriced (my measure of underpricing, exuberance is -17.9%) but all sectors are currently cheap by my measure with the ASX 200 being underpriced by -4.6%. Our capital gains forecast continues to rank the sector as the best prospect (25.1%) over the next 12 months and our capital gains forecast adjusted for exuberance is a whopping 43%.

As the financial year draws to a close, one would expect some turbulence from investors re-arranging their portfolios for the year ahead. On top of that, the tapering of QE is aggravating the situation, but there is an undeniable strength emerging in the US economy and policy makers are at last on top of starting to solve the problems of the European economy. This strength in these real economies can only benefit this non-mining sub-sector.

The falling dollar creates some issues because of the uncertainty it brings to planning but, if it settles down to a figure well below parity, the lower dollar might also benefit some of the non-mining materials stocks. However, I still favour other parts of the ASX 200 – in particular, the big miners in the broader materials sector and the big banks, until the market fully absorbs the tapering talk and the China credit squeeze.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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