Stockbrokers See Value Among Small Caps

This story features EMECO HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: EHL

By Rudi Filapek-Vandyck

The world is not falling off a cliff, assure economists at Macquarie. They published an extensive report on Monday morning trying to convince their clientele that slowing purchasing managers' indices (PMIs) for the manufacturing sector across the world simply means the effect from restocking and government stimuli is running out – but the world economy will still be growing in the second half.

Resources analysts at RBS Australia have taken the opportunity to once again highlight the apparent cheap valuations for Australian mining stocks. The analysts suggest now that the Gillard government has watered down the punitive concept of the Resources Super Profits Tax, maybe investors can once again look into what is really on offer in today's share market?

RBS analysts are not holding their breath though, admitting concerns about global growth prospects are likely to prevent a general re-rating for the sector.

Analysts at UBS report their five factor analysis of the sector revealed that back in April all five factors had been flickering red warning signals. This time around, however, three of these factors are now firmly into the green, while a fourth one is improving. This only leaves “the end of inventory cycle” as the sole red light remaining for share prices of resources companies.

The three factors now firmly in green are valuation (see also RBS), market positioning and dollar fund flows. The one factor improving but not quite in the green yet is “Chinese policy stance”.

The team at UBS is keeping it safe, expressing their view that on a three year timeframe they remain convinced commodities and mining stocks will rise. As far as the short term outlook goes, they remain a little more circumspect.

Maybe good to point out that global strategists at UBS prefer to talk about “softs” and “agricultural products” as well as “precious metals” whenever they reiterate their overweight stance for this particular asset class.

The small caps team at Credit Suisse has taken the opportunity to reiterate why they like nickel producer Western Areas ((WSA)) as much as they do. Credit Suisse has a price target of $5 for the shares, suggesting the present discount has gapped to some 23%; but say the analysts without the RSPT their valuation rises to $5.40, suggesting 40% undervaluation.

Analysts at Morgan Stanley reiterated their positive stance on Western Areas last week. The stock is one of the Buy recommendations with Conviction the stockbroker has for the Australian share market.

Note that three of the five top-rated small cap stocks at Credit Suisse are all related to the mining sector. CS small caps specialists like Campbell Bros ((CPB)), Emeco ((EHL)), Clough ((CLO)), Molopo Australia ((MPO)), Mermaid Marine ((MRM)) and The Mac Services Group ((MSL)) in the sector, but Campbell, Emeco and Mac Services are on its top five list. The other two are retailers Domino's Pizza ((DMP)) and Pacific Brands ((PBG)).

Investors should note that Credit Suisse's top five list simply calculates the highest projected returns for the year ahead on the basis of price targets and share prices. Contrary to conviction lists elsewhere, there is no “conviction” involved at CS.

The team of emerging companies specialists at Goldmans made two changes: Oakton ((OKN)) has been removed from the model portfolio and replaced with Reckon ((RKN)) while Ausenco ((AAX)) lost its spot which was given to WHK Group ((WHG)).

Other companies that make up Goldmans' model portfolio are Atlas Iron ((AGO)), Bradken ((BKN)), Breville Group ((BRG)), BT Investment ((BTT)), Equinox Minerals ((EQN)), Henderson Group ((HGG)), Kathmandu ((KMD)), Kingsgate Consolidated ((KCN)), Macarthur Coal ((MCC)), Mitchell Communications ((MCU)), Oroton ((ORL)), PanAust ((PNA)), Programmed Maintenance ((PRG)), Ramsay Healthcare ((RHC)), Sedgman ((SDM)) and Ten Network ((TEN)).

Click to view our Glossary of Financial Terms