Shifting Between Commodities And The Rest

This story features EQUINOX RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: EQN

By Rudi Filapek-Vandyck

Commodities analysts at Credit Suisse likely captured the mood among many institutional investors and funds managers as February sees prices for risk assets climb ever so higher: resources stocks cannot outperform when commodity prices are falling. Thus far we've seen relentless rallies for commodity prices, but CS analysts are quick in their response: current prices will not prove eternally sustainable.

Hence it becomes a matter of timing?

CS analysts have left the timing issue aside and concentrated on mid-cycle value instead. What this means is they have tried to establish which companies inside the mining and metals sector in Australia still represent good value even if commodity prices will eventually move lower. The analysts have tried to put together a set of dynamics and input variables in order to create a through-the-cycle valuation assessment.

Without going too much into details, the broker's exercise has generated one absolute stand-out and that is copper producer Equinox ((EQN)). Others that still stand-out on valuation grounds are Rio Tinto ((RIO)), BHP Billiton ((BHO)), Iluka ((ILU)) and New Hope Coal ((NHC)).

Market strategists at Goldman Sachs published another update on their Conviction Buy list, with online jobs services provider Seek ((SEK)) being the latest newcomer to the list. In line with CS's comments, and with the three Weekly Insights stories I wrote this year so far, it has to be noted the balance in GS's conviction for the year ahead has gradually shifted away from metals and energy stocks, though it has to be acnowledged there's still a large connection with commodities and growth to be found.

Goldmans current Buys-with-Conviction consists of the following stocks:

– Aquarius Platinum ((AQP))
– BHP Billiton ((BHP))
– CFS Retail Property ((CFX))
– News Corp ((NWS))
– PanAust ((PNA))
– Seek
– UGL ((UGL))
– Wesfarmers ((WES))

Over at UBS, market strategists clearly have set their sights on potential outside the resources sector. UBS's list of Key Calls has been extended with Tabcorp ((TAH)) and Graincorp ((GNC)). Both names are complementing Asciano Group ((AIO)), CSL ((CSL)), JB Hi-Fi ((JBH)), Qantas Airways ((QAN)) and Rio Tinto ((RIO)).

Tabcorp seems to have been elevated because of increased M&A potential once the corporate split is in place. While Graincorp shares are labeled simply too cheap. Also, UBS analysts anticipate Graincorp's earnings per share will grow by 33.5% in 2010 and by 64.3% in 2011.

Two other names on the list might do even better with Rio projected to improve EPS by 101.7% in 2010 and by 32.9% in 2011. Qantas, on the other hand, is projected to grow EPS by 184.5% in 2010 and by 117.3% in 2011.

An interesting exercise was conducted by transport analysts at Citi. They opened coverage on the sector on Tuesday and part of the sector analysis was made up by a competitive analysis between Asciano ((AIO)) and QR National ((QRN)). To go immediately to the stockbroker's end conclusion: between now and 2020 Asciano will dwarf QRN in market share gains and consistent growth. Not difficult to see why the first one has received a maiden Buy rating while the second now carries a Sell rating from Citi.

And lastly but not least, analysts at RBS remain true to their earlier observations that paying attention to changes and shifts in local short positions data can provide investors with some timely insights. As such, RBS notes there's an increasing level of investor interest from the short side for companies including Leighton Holdings ((LEI)), Downer EDI ((DOW)), UGL, WorleyParsons ((WOR)), Transpacific Industries ((TPI)), Toll Holdings ((TOL)), Macquarie Group ((MQG)), Bank of Queensland ((BOQ)), Perpetual ((PPT)), David Jones ((DJS)), Myer ((MYR)), Harvey Norman ((HVN)), Billabong ((BBG)), WA Newspapers ((WAN)), BlueScope Steel ((BSL)), OneSteel ((OST)), Atlas Iron ((AGO)), Riversdale Mining ((RIV)), Amcor ((AMC)), Ansell (ANN)), Nufarm (NUF)) and ResMed ((RMD)).

On the flipside, shorts interest seems to be declining for stocks including Oil Search ((OSH)), Beach Energy ((BPT)), Australian Securities Exchange ((ASX)), Computershare ((CPU)), Transfield Services ((TSE)) and Equinox Minerals.

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