Rudi’s View: AI, Lithium, Uranium & Steadfast

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

Part Two of this week’s Weekly Insights contains:

-Profit forecasts in Australia and the USA
-Uranium stocks on the move
-Lithium spurred on by take-over enthusiasm
-Steadfast Group
-October Global Fund Manager Survey by Bank of America
-Best Buys & Conviction Calls
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

The local share market looks “expensive”?

On Macquarie’s number crunching the market’s Price-Earnings (PE) ratio has now reached 19x next year’s (FY25) forecast EPS. Added info: on Macquarie’s forward-looking projections the average EPS in Australia will be another negative -4.3%, following on from the negative -4.4% recorded for FY24.

Readers who pay attention will have noticed Macquarie’s numbers look worse than market consensus which still assumes a recovery in local profits that has the average EPS growing (positive) by some 3%. UBS is expecting an upgrade cycle that will lift that number to circa 6% by mid next year.

The difference, it turns out, is Macquarie is a whole lot more negative on the resources sector; projected EPS -15.7%, having already printed a negative -17.4% for FY24. But even ex-resources, Macquarie’s projections remain below average with projected FY25 EPS ex-resources sitting at 1.6% positive.

Whatever is our personal bias towards these projections, Australia remains positioned in the low-to-no-growth basket of global markets. Elsewhere around the globe analysts’ forecasts are projecting a generally robust recovery in corporate profits with developed markets generally expected to see profit growth of 13% and with the USA yet again outperforming with an expected 15% growth on average.

It does make one wonder what exactly is the secret elixir that turns corporate America into the Obelix of the world, time and again?

One obvious ingredient, it turns out, is Gen.Ai. Past the millions of dollars in investments made into data centres and power generation capabilities, corporate America has become an enthusiastic integrator of the new technological breakthrough into business processes and supply chain management.

The result, if everything works out according to plan, is for extra growth acceleration through higher margins and/or additional revenues. Growth that otherwise would not be on offer.

But how confident exactly can investors be these forecasts do not end up as pie in the sky? Equity indices continue to reach for fresh all-time record highs and multiples look elevated including Gen.Ai benefits that are yet to show up, hence a little bit of skepticism looks at least a little bit justified.

Analysts at Morgan Stanley interviewed decision makers in 400 businesses over six different industries spread over five countries and it appears the early signals are supportive of analysts’ forecasts. There’s still plenty of hesitancy around, but those projects that are put in place are proving “surprisingly positive” outcomes, the analysts report.

In particular larger companies are noticing the benefits.

The survey also revealed a distinctive gap between larger and smaller-sized ‘adopters’ whereby the larger companies are focused on cost reduction (i.e. margin expansion) in contrast to smaller companies that are looking to increase revenues (i.e. grow the business).

Bottom line: Morgan Stanley’s confidence in the delivery of concrete benefits through Gen.Ai via corporate profits in 2025 has only been strengthened. Wouldn’t be the first time America is leading the rest of the world either.

Elsewhere, US strategists at the firm remain skeptical whether smaller caps in America are now poised to outperform the bigger end of the market. Many an investor is hoping for a small cap blast after 3.5 years of painful underperformance, but Morgan Stanley stoically refuses to join the crowd.

For small caps to decisively outperform, the economy needs to start firing on all cylinders, the strategists explain. By all means, there’s no sign such acceleration in momentum is imminent. Morgan Stanley has upgraded US small caps to Neutral. That’s as far as the strategists are prepared to shift at this point.

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I’d be looking at buying some exposure to uranium, I suggested back in late July.

Share prices in ASX-listed uranium exposures were weakening noticeably and with the fundamental outlook for yellow cake only strengthening further, notably weaker share prices didn’t seem to make much sense.

As it turned out, share prices continued to weaken for another two months. The tide seems to have turned in recent weeks and in particular this week robust rallies can be seen in share prices of Paladin Energy ((PDN)), Boss Energy ((BOE)), Lotus Resources ((LOT)), and others.

Over in North America, shares in industry leader Cameco have followed a similar pattern, quickly surging to an all-time record high this week.

As also reported in FNArena’s Weekly Uranium report, short positions in ASX-listed exposures had been steadily on the rise throughout 2024, placing all three companies mentioned inside the Top Ten of most shorted stocks on the Australian bourse.

It’ll be interesting to watch the ASIC data on shorts in the coming weeks to find out how many of those short positions are staying put.

My story from late July: https://fnarena.com/index.php/2024/07/25/rudis-view-how-to-invest-allans-300k-part-2/

FNArena’s The Short Report: https://fnarena.com/index.php/analysis-data/the-short-report/

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A complete different dynamic has descended upon the local lithium sector this month. Having been the flavour du jour throughout 2021 and 2022, lithium producers and hopefuls have experienced the toughest of times since. If analysts’ assessment of underlying demand versus supply dynamics proves correct, there’s no quick end in sight for the industry’s dire situation either.

Now enter Rio Tinto ((RIO)) paying up to acquire Arcadium Lithium ((LTM)), itself a merger between Australia’s Allkem and Livent of the US that was only concluded in January this year.

Rio Tinto’s move is remarkable given bigger brother BHP Group ((BHP)) has steadfastly refused to seriously consider moving into this sector as its in-house philosophy requires long-dated assets on relatively low costs to extract, which always proves invaluable when the elongated downturn arrives, as it now has for lithium.

Rio Tinto must have a different strategy then. My hunch is the company is banking on its size and balance sheet which, in comparison with all the lithium producers combined, remains gargantuan. Plus lithium will be no more than a small side-show in comparison with the cash flows derived from iron ore, copper and aluminium. Being by far the biggest in a tiny sector must have its advantages too.

Rio Tinto’s acquisition of Arcadium Lithium did trigger renewed interest in other beaten-down share prices with speculation rife as to whom might become the next corporate target.

Not sure whether there’s any substance to such enthusiasm, however. As stated, BHP is not interested. I’ll have the opportunity to meet up with local management at the Big Australian next month and I expect no change in view on this matter. Other Elephants in the mining industry, such as Vale and Anglo American, have no appetite either, local mining analysts suggest.

This puts the focus on the two giants inside the lithium industry, Albemarle and SQM, but both are reportedly hunkering down to sit out this nasty downturn. We probably shouldn’t expect any moves from them either.

So who’s left then?

A recent sector update by Evans and Partners suggests interest might come from industrial companies such as energy producers and chemicals companies. After all, assets are relatively cheap and sector dynamics will not remain as dire forever. Evans and Partners’ sector favourite is Pilbara Minerals ((PLS)).

A sceptical Macquarie is not buying into the hype and decided to downgrade its ratings across the sector this morning. Rio Tinto’s acquisition does validate the long-term value on offer, the broker suggests, and lithium prices might well have seen the bottom, but none of these two factors implies share prices should continue to rally.

Macquarie also downgraded Rio Tinto to Neutral, having a preference for BHP at the upper end of the sector.

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Lots of questions have been asked by subscribers about my thoughts on insurance broker Steadfast Group ((SDF)). As most would know, an investigation by the ABC’s Four Corners in September has put a big dent in the share price trajectory and the market is clearly hesitant to move back onto the register with gusto.

That investigative reporting unearthed what looks like a deliberate corporate strategy to strangle the Australian strata management market and keep pricing benefits artificially inflated. The company itself denies all allegations, as is always the case.

Firstly, I have liked the business for a long while. At some point I added it to my curated lists as a potential All-Weather and the robustness of this type of business itself is mirrored in overseas experiences.

As clearly shown on the ten year price chart, Steadfast has been great for shareholders, which is equally reflected in the financial numbers and metrics that underpin that share price performance up until September this year.

But what now?

My response to questions received has been two-fold:

Yes, indeed, the shares look undervalued and ‘cheaply’ priced, but one has to consider the potential for intervention by either the regulator or the government. This is why the market lacks confidence about what likely follows next.

Will we see imminent action? Strata management is corrupted in Australia. One has to feel for the many apartment owners confronted with very little recourse or oversight, but then housing is in a real crisis and that’s when governments often feel compelled to do something. Even if it is only for positive optics.

The second consideration is a personal choice. If part of Steadfast’s robust and reliable performance is based on an immoral stranglehold over a large chunk of local apartment owners, is owning shares in this company still okay and in line with one’s own values and principles?

As said, that second consideration is personal and equally applies when considering gambling companies, coal producers, military weapons manufacturers, tobacco and alcohol, and the like. Running a business successfully tends to contrast with keeping clean hands and a pure conscience generally as also illustrated, yet again, by the latest accusations regarding supermarket owners Coles Group ((COL)) and Woolworths Group ((WOW)).

The same observations involve the local banks who won’t miss a chance to slap an extra fee or reduce a payment (let’s not forget the insurers either).

Back to Steadfast; its growth trajectory will increasingly become a US-centric story where management and the board are on the look-out for acquisition opportunities. Lots of them.

In line with Weekly Insights part one as communicated first via email on Monday, the FNArena-Vested Equities All-Weather Model Portfolio has decided to take some money off the table this month. To facilitate a slight increase in cash, the Portfolio has sold its exposure to Steadfast.

The company will remain on my personal selection, as investors can make up their own mind.

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Regarding the above, the October Global Fund Manager Survey by Bank of America has recorded the biggest jump in investor optimism since June 2020. Direct triggers have been the Fed rate cut, China stimulus and increased confidence in a ‘soft landing’ for the US economy.

BofA analysts can clearly see “froth on the rise”, but their Bull & Bear Indicator is still only at 7.1; not yet the big sell signal that is triggered when this indicator reaches 8.0.

In line with the spike in market optimism, the survey equally reveals the biggest jump in global equity allocation since June 2020 alongside a record drop in allocation to bonds. The big rotation has been in Emerging Market equities and discretionary and industrials (‘cyclicals’), away from staples and utilities (‘defensives’).

The average cash level has now fallen below 4%, at 3.9%. Historically, reports BofA, this triggers a contrarian sell signal for the next three months.

The key negative coming out of the upcoming US election is seen with either party sweeping into a majority in Congress. 47% of respondents sees this outcome as a negative for the S&P500, also leading to higher bond yields and a stronger USD. Although views on the dollar are less uniform.

Best Buys & Conviction Calls

Ord Minnett has communicated its most preferred choices on the ASX:

-AGL Energy ((AGL))
-Alliance Aviation ((AQZ))
-ARB Corp ((ARB))
-Brambles ((BXB))
-CSL ((CSL))
-EQT Holdings ((EQT))
-Insurance Australia Group ((IAG))
-Judo Capital ((JDO))
-James Hardie ((JHX))
-Medibank Private ((MPL))
-Newmont Corp ((NEM))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-Qantas Airways ((QAN))
-Regis Healthcare ((REG))
-Rio Tinto ((RIO))
-ResMed ((RMD))
-SRG Global ((SRG))
-Santos ((STO))
-Strike Energy ((STX))
-Telstra ((TLS))
-Vault Minerals ((VAU))
-Vicinity Centres ((VCX))
-Westpac Bank ((WBC))
-Waypoint REIT ((WPR))
-Xero ((XRO))

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Wilsons’ update on Highest Conviction investment ideas has led to the inclusion of Santos ((STO)) with Car Group ((CAR)), James Hardie, Hub24 ((HUB)) and Aristocrat Leisure ((ALL)) retaining their spot among domestic favourites.

Among Research Ideas, the following six names are seen as Long Term Growth ideas:

-Flight Centre ((FLT))
-Ridley Corp ((RIC))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Siteminder ((SDR))

For those with a more speculative mindset, Wilsons puts forward PYC Therapeutics ((PYC)). In the Resources sector, the choice is Beach Energy ((BPT)).

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Wilsons’ Australian Equity Focus Portfolio consists of the following:

-CAR Group
-Aristocrat Leisure
-WEB Travel Group ((WEB))
-Lottery Corp ((TLC))
-Collins Foods ((CKF))
-Breville Group ((BRG))
-Santos
-ANZ Bank ((ANZ))
-National Australia Bank ((NAB))
-Macquarie Group ((MQG))
-Westpac Bank
-Hub24
-Steadfast Group
-CSL
-ResMed
-Telix Pharmaceuticals ((TLX))
-Worley ((WOR))
-Xero
-TechnologyOne ((TNE))
-BHP Group
-James Hardie
-Evolution Mining ((EVN))
-South32 ((S32))
-Metals Acquisition ((MAC))
-Arcadium Lithium ((LTM))
-Sandfire Resources ((SFR))
-HealthCo Healthcare & Wellness REIT ((HCW))
-Goodman Group ((GMG))

New inclusions are: Web Travel Group, Santos, BHP, James Hardie and Metals Acquisition.

See also: https://fnarena.com/index.php/2024/10/10/rudis-view-china-scepsis-energy-preferences-the-us-election/

FNArena Talks

Danielle has interviewed Nilesh Jasani, founder of GenInnov Global Innovation Fund. The video has been added to the website  and is also available via YouTube:

https://youtu.be/0mVrFMA2CUY

Part One of Weekly Insights this week: https://fnarena.com/index.php/2024/10/16/rudis-view-five-key-risks-to-consider/

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi’s View stories. Go to My Alerts (top bar of the website) and tick the box in front of ‘Rudi’s View’. You will receive an email alert every time a new Rudi’s View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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