Only one stock from this sector, Nufarm (NUF), did not make a capital gain (Table 1) in the period since my last review (25th June 2013). Indeed, only two stocks, Nufarm and Incitec Pivot (IPL), did not outperform the ASX 200 over the period!
So, while this sector performed very well in recent times, a number of these companies suffered during the GFC. However, with the US economy seemingly getting back into shape, and our dollar having fallen back to around US 90 cents , a closer look at this sector is now appropriate.
Table 1: Data on companies in the ASX 200’s Materials (Non-mining) sector
Source: Thomson Reuters Datastream and Woodhall Investment Research – 14 January, 2014.
The ones to watch
While Sims (SGM) and Orica (ORI) have acceptably good consensus recommendations – being less than 2.5 on a scale of 1 (buy) to 5 (sell) – both ratings have slipped over the period. On the other hand, Bluescope (BSL) and Incitec Pivot have improved their ratings into this range. Bluescope’s price has been on an upward trend since it was beaten down in 2012. Incitec reversed its year-long downward price trend in early December 2013. Perhaps it would be worthwhile watching Incitec for a little while longer with a view to getting on board.
Orora (ORA) is also worth watching, but with only four analysts following the stock – against double figures for the other top 100 stocks – a bit more support from brokers would be needed to attract me at this stage.
The sector analysis in Table 2 paints a solid, but not spectacular future for both the sector and the index. With exuberance for the sector at 3.4%, these stocks as a group look cheap. However, with there being no specific index for non-mining, it is not clear whether the under-pricing is uniformly across both sub-sectors.
The broader index is only a little under-priced. But the sector to watch is industrials. There is more in common between industrials stocks and non-mining stocks compared to the companies in the two subsectors of materials. Not only does the industrials sector have a great forecast of capital gains for the next 12 months at 22.3%, this forecast has been steadily upgraded over recent months, while that for materials and the ASX 200 have been slipping.
So my conclusion is that there is a better comparable sector to watch than materials – i.e. industrials – but Orora is one to spend a little time on as a potential for good returns in 2014.
Table 2: ASX 200 sector statistics
Source: Thomson Reuters Datastream and Woodhall Investment Research – 14 January, 2014.
Note: Exuberance is a measure of mispricing (negative is underpriced) and cap(ital) gain is adjusted for exuberance. Cons. Rec. is the consensus recommendation from Thomson Reuters . 1 is a buy, 3 a hold and 5 a sell
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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