Energy stocks that will outperform

Chief Investment Officer and founder of Aitken Investment Management
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I realise all the wise sages out there who use big scary words to describe their degree of bearishness can’t understand why anyone sane would believe in a V-shape recovery in east-facing equities, but I believe, and that remains my core trading and investment strategy, even when the market takes a beating like last night’s.

It’s even more lonely today being bullish than it was in April being bearish, despite share prices being 20% to 50% lower. Every Australian stockbroker and analyst is now an expert on Italian bonds, when three months ago they wouldn’t have known what the Bloomberg ticker was. Everyone is obsessed by daily European sentiment developments, and have completely taken their eye off Australian stock-specific developments and fundamental analysis.

Similarly, everyone seems convinced the very low ASX trading volumes are a sign of a prolonged bear market, whereas I believe low trading volumes are a derivative of very low investor and trader confidence, which is actually a very bullish development. You never get confidence and deep contrarian value together. I am convinced volume will return to Australian equities at higher prices once the investing world has the confidence to believe Euromess is resolved (or at least not getting any worse). In my view, that day remains closer than most people believe.

My strategic view remains that you want to exit Euromess with a very east-facing portfolio – that is, Asia! While Perth is about as west as you can get in Australia, Western Australia has the greatest direct and indirect leverage to the rise of Asia.

At a strategy level, we are heavily overweight in mining services, believing this structural growth cycle has many, many years to run, yet it’s priced to end tomorrow by the very short-sighted equity market.

I promise that you will all look back with the benefit of hindsight in a few years’ time and say, “I should have been braver in Asian equities during the Euro debt crisis”, just like we all said two years after the peak of the GFC when Australian banks had doubled from their lows, ditto BHP.

It’s exactly the same playbook. The trading community targets the weakest link. The global central bank and government response is the same – print money – and the market ramifications will be exactly the same as we come out the other side of this crisis. In an Australian context, that means the market will be led higher by resources, discretionary retailers, media, banks and high sustainable dividend yield stocks (as interest rates fall).

I also believe you can see commodities starting to look across the European valley and out the other side. The WTI and Brent Oil prices remain firm, industrial metals are rising, precious metals are rising, led by gold, and even spot iron ore has clearly bottomed. This commodity firmness is all about the medium-term effect of coordinated global money printing and the growing and correct view of a soft landing in China. Note, commodity prices are outperforming the Australian dollar as we enter a rate cut cycle, which is very important for the domestic resource sector.

In my view, Australian commodity equities simply follow Australian dollar commodity prices in the shorter-term.

My top three energy sector stock picks:

The energy sector has suffered in line with market weakness and this has created some great investment opportunities. Our recommendations in order of preference are as follows, keeping in mind that the risks in some of these stocks are high.

  1. Neon Energy (ASX:NEN) – Neon is still our number one pick in the sector. The Californian oil assets are arguably worth more than the current share price and Vietnam exploration offers big upside.
  2. Sundance Energy (ASX:SEA) – Sundance is our preferred shale play, with the Bakken production assets worth more than the share price. Upside to other emerging US shale plays comes for free.
  3. Antares Energy (ASX:AZZ) – Antares is our most undervalued shale play and we are confident that the results will come through to demonstrate value.

Aquila Resources (ASX:AQA) – Buy

The West Pilbara Iron Ore Project (WPIOP) is the key asset in Aquila’s portfolio of growth projects. Aquila must prove that it can finance this project ASAP to be appointed the lead proponent for the Anketell Point port development, the key to (WPIOP). Otherwise Fortescue Metals may be appointed and could delay the port to suit its timetable, a negative for Aquila. The suggestion that its joint venture Anketell Point has adjusted its proposal to be amenable to other users, and that significant progress is being made on the financing front, is a key positive.

Our target price is $9.82. AQA closed at $6.76 on 9 November 2011.

Dart Mining NL (ASX:DTM) – Spec Buy 

Targeting a new molybdenum porphyry province in Australia, Dart Mining is an exploration company focused on developing a pipeline of base metals and gold projects near Curryong in Victoria. It emerged strongly in the fourth quarter, notwithstanding volatile markets. While exploration is at an early stage and metallurgical results are pending, the October resource estimate represents a milestone towards de-risking the Unicorn project. With few ASX-listed molybdenum companies, Dart is well placed to benefit from an encouraging resource development opportunity in an underexplored porphyry province. Value is speculative.

Our target price is $0.18. DTM closed at $0.12 on 09/11/11.

Disclosure: Bell Potter Securities acted as underwriter for Dart Mining’s 15.4 million listed options (DTMO) exercisable at 10 cents by 31st of December 2011 and received fees for that service.

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.

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