Which frothy mining and oil shares have legs?
Ken Odeluga April 21, 2016 6:07 PM
<p> (This article can be read standalone or as ‘part 2′ of an article published earlier) After a spring surge in oil and metals […]</p>
(This article can be read standalone or as ‘part 2′ of an article published earlier)
After a spring surge in oil and metals prices fuelled a string of 2016 highs for the FTSE 100 this week, the obvious question is: will gains by digging and drilling shares fizzle out soon, or run even further?
Euphoria vs. reality
Unfortunately, whilst stock prices are so euphoric it’s a difficult question to answer. Especially given that there are few signs that the era of loss-making natural resource production is over.
(In other words, share prices seem to be in one of their frequent phases of being disconnected from fundamental reality).
That said market expectations for how well mining and oil companies will manage their unprofitable operations over the medium term should provide us with some hints.
Whether or not investors expect decent proceeds from resource assets in the year ahead, it makes sense to think that assets that relatively outperform will provide their owners with an edge.
Return on Assets consensus forecasts can tell us how efficiently miners and oil companies are expected to run their companies.
GOLD MINING ASSET RETURNS SHINE
Prices and data as of Wednesday’s close
(Imagination Technology is included in the above list because it was among the top FTSE 350 performers referenced in a related article.)
That gold miners, Centamin, Randgold, Fresnilo and Acacia, dominate, along with gold-tinged, Anglo-American, should be little surprise.
They’re like leveraged proxies on the metal right now.
Physical gold has risen just under 20% since November lows, resuming its status as a ‘safe haven’. That’s a typical inverse move when the Federal Reserve is on the back foot. The central bank has retreated from a more determined stance seen just months ago, with rates markets now forecasting just one more rate hike at most in 2016.
Low rank, high forecast
Our rationale suggests North-Africa and Mid-East focused Centamin, the tenth-best riser over 3 months, might deserve even more attention than the market has paid it already.
It has one of the best credit and debt profiles among our group, according to Thomson Reuters data.
Whilst one of the earliest movers in our batch—up 45% year-to-date already earlier this month—it also deserves ticks for holding on to full-year guidance during a recent update, despite lower than expected output from some mines.
Average forecasts for Centamin carry more weight because their standard deviation is moderate.
Further down our asset returns list, it looks like blue-chip focused investors already reacted to Anglo American’s forecast returns.
The stock was Number 2 in our top ten 3-month risers.
Randgold is the only other blue-chip spotlighted, but maybe we should be wary of it. Its ROA forecast is jutting out further from the pack than the average (high standard deviation).
So is Evraz’s. The latter looks like a (too?) early bet on a fall in global steel production capacity (especially in China).
In the end, as is probably clear, none of the stocks we highlight are on a tear because investors expect strong organic growth.
That brings us back to ‘froth’: AKA price performance that looks unmoored from fundamentals.
On that basis a final sift of the list makes sense.
We screen for stock price ‘momentum’—the tendency for stocks to continue on their trajectory if it’s a clearly defined one.
Multi-factor data from Thomson Reuters ranks our stocks from ‘0’ to ‘100’, with higher values the best.
We found the average value was around fifty, leaving shares that ranked well-above average as follows:
FROTHY MINING AND OIL STOCKS WITH LEGS
Prices and data as of Wednesday’s close
Within the context of recent price action, which seems far from sustainable beyond the medium term, these are the outperforming shares likeliest to extend gains further.
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