Among resources-related smaller stocks, the value drums have suddenly started beating.
Indeed there was explicit evidence this week of investors hunting for value as the share price of the engineering services contractor Monadelphous spiked over 50 per cent.
As it happens, the company got promoted into the S&P/ASX 100 Index and some funds were forced to buy it. Then there was global investment manager Blackrock, which put its hand up, saying it had mistakenly moved its shareholding from 10.99 per cent to 20.77 per cent, above the 19.99 per cent limit that means a takeover must be made.
OK, so somebody at the big fundie has fat fingers, and maybe some punters shorting the stock got burned but the fact remains that investors are chasing value like never before because of the lack of it across the rest of the market.
It’s not hard to see why. The benchmark S&P/ASX 200 has climbed 10 per cent this year as it races towards the 6000 mark. This is being led by the big banks, Telstra, Wesfarmers (owner of Coles) and pharmaceutical giant CSL. The ASX is among the most concentrated markets in the world and the index is heavily weighted towards companies benefiting from low interest rates.
Even at the smaller end the so-called quality stocks that are producing earnings growth are trading on expensive PEs of over 30 times. This is because of the “going for growth” strategy used by many fund managers. These are companies such as software developer Altium, wealth management technology provider GBST and junior telcos like Vocus and M2 Communications. These stocks trade on prospective PEs of about 30 times.
For investors to generate adequate returns from stocks such as those listed above, or indeed anything trading on PEs of 16 or above, double-digit earnings growth needs to continue for some time.
While some sectors of the market are bid up, other investors are looking for stocks where expectations are much lower, which trade on single-digit PE multiples. During the recent reporting season many small cap stocks moved up significantly, confirming that the market had been overly pessimistic. These included stocks such as MACA, Decmil, Mermaid Marine, Capral, ASG, APN News and Bentham IMF.
Trying to call the bottom of the market in mining and mining-related stocks has proved to be a losing strategy for all but a few stocks during the bull run, but to my way of thinking, buying expensive so-called growth stocks involves holding your nose and hoping that momentum keeps delivering.
Two weeks ago this column spoke of the mining services operation GR Engineering, which had delivered our subscribers a 75 per cent return, but there have been other recent wins among companies that have been beaten down and trade on low multiples. Footwear retailer RCG is up over 50 per cent after announcing a $200 million acquisition of New Zealand’s Accent Group. Try getting that sort of return from a bank.