The US market smashed through the 10% correction level falling 12% from it’s all-time high in a matter of only 6 trading days, seeing one of the largest falls for my generation of traders and investors. The spread of the Coronavirus was the trigger, but if we look at reality, the virus is not the full reason for such a dramatic pullback. Many stocks were overvalued when the XJO was sitting at 7,150 and this correction seemed a little overdue. Since I started in financial markets, I have seen corrections become quicker in terms of time frame and larger in size. We can blame technology on this, with the growth of online trading platforms, ETF’s and Algorithmic traders being able to get orders into the market quicker than ever. Then when everyone decides to run out the door at the same time, the crash can be unnaturally fast and large.
If you look at all the risks that have hit the markets over the past year, I for one am very surprised we sold off this hard considering we don’t really know how bad this virus will be. From trade wars to government shutdowns, Brexit and yield curve recession warnings, the market remained on a steady uptrend. This perhaps was due to the promise of stimulus and steady but low-interest rates. However, I’m not surprised that the market has corrected, the question is will we now go into a bear market?
Well that will all come down to two things, will the virus spread quickly through other countries causing a drag on the world economy, and what are central banks and the governments of the world going to do to stimulate? We have seen the RBA cut rates today, with China and Hong Kong delivering Fiscal and Monetary policy. I do feel there will be a high probability of further stimulus measures to be introduced around the world.
All we can do as Investors and Traders is to get ready to buy and make the best-educated decision on when the best time is to buy. Then look for awesome stocks selling at awesome discounts. I have also stayed away from stocks that I feel have a direct impact from the virus, like travel stocks.
I’m not going to give you a prediction of where the bottom of this move is, as I don’t have a crystal ball that can show me how bad the virus will be, but if you are happy to hold for the long term there are some stocks I would seriously be looking at buying. Looking back at the long term trend of the market we will likely be looking back at his event in the future with the market back up at 7,200.
FMG- Fortescue Metals Group Ltd
FMG is very quickly growing to be amongst the largest Iron Ore miners, with a 30% growth in profit. Being less diversified and with Iron Ore holding strong, FMG has outperformed its peers over the past 12 months. Iron Ore has pulled back a little around the Coronavirus worries but seems to be finding support already. In saying that, we are yet to hear the news that the Iron Ore refineries in China are closing, but rebar is starting to pile up.
They have done a fantastic job of paying down debt over the years with the Debt to Equity ratio now at 32.24. Also inline with BHP and RIO they have dropped costs down to US12.73/WMT.
FMG has offered a very generous dividend with an expected yield of around 13% and went ex-dividend yesterday.
So, I would be looking to BUY FMG around the $8.00 – $9.50. With a price target back $11.00.
If you are looking for a dividend, Rio Tinto has a Dividend on the 5th of March of 4% for the half-year. The total yield for the year is expected to be around 9.26%. Also, you can buy RIO on the Cum div market on Thursday if you miss the chance on Wednesday. Just call the office to find out how.
JHX- James Hardie Industries PLC
JHX was a little soft on its quarterly report but is still expected to have a bumper year with Earnings expected to grow around 20% for the full year in March. JHX is well-positioned to continue to hit growth targets with a large population and infrastructure growth both here and in the US.
JHX is also expected to release some new product lines into the US later this year which already trade here in Australia, if successful this could also help boost the company’s performance.
JHX is holding a key level at $28.00, if we see a buy signal here, we will be looking to jump on with a price target back at around $32.00.
APX- Appen Ltd
Appen has been one of the tech darlings of the Australian market, trading as high as $32.00, but more recently falling back to a key level of support at $20.50 and bounced. This company has been growing and is expected to continue to grow EBIT at around 15% per year. The current Price-to-Earnings (PE) is still high at around 63.00 but if they meet expectations on earning this year that PE will go down to 33.00 which is not bad for a Tech company in the current environment.
Debt is very low with many brokers setting targets up around the high 20’s to mid-30 levels. I would look to buy around the $20.00 – $23.00 levels on confirmation that the free fall on the market is over.
ANZ- Australia and New Zealand Banking Group Ltd
ANZ had a hard time through the Banking Royal commission as did most of the financial sector but are now in a great position to rebound coming into its reporting in May. Using CBA as a comparison, it rose strongly into its report with the report being a little better than expected. ANZ is almost back to its lows of the year at $24.16.
ANZ is a great yield play sitting at 8.55% including franks at current levels. It is running at a PE of 12 which is looking cheap compared to CBA at 18.5.
Earnings growth is looking to be a little negative still this year, but we feel that has already been priced in. ANZ’s first reaction to the rate cut was a fall, this is perhaps due to the fact that their net interest margins can be affected by rates falling. But on the other side of the coin, it will also help avoid a blowout in bad debts, and don’t forget ANZ is 17% below last year’s high.
ANZ looks good for a buy around current levels at $24.00 – $25.00, with targets, back the most recent resistance at $27.00.
This is only a few of the stocks I’m looking at right now, there are many more, and we will be sharing these with everyone in our new product called Emerald Equities.
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