Where are the opportunities to buy ASX Shares?
In today's ASX share market update we discuss the implications of a negative oil price for ASX share investors. We also talk about the spike in the uranium price and whether it's worth taking advangage of.
We also highlight opportunities to buy shares and give you some of the ASX stock tips we are following.
What is the oil price doing and why does it matter for ASX Shares?
The oil price rout that started earlier in the week has only accelerated with news that the US benchmark, West Texas Intermediate (WTI) fell below zero; producers are paying buyers to take oil off their hands.
This has big implications for global growth, but the crucial point to note for share investors right now is how quickly the rout has morphed into a financial crisis.
We'll go through the detail later, but obviously it's not positive for the oil price, although the seaborne based Brent oil price at US$25.57 a barrel does give a better indication of the real price based on physical supply and demand.
The bigger point is that we will be seeing continued share price volatility on the ASX for a while yet (six plus months) as waves of real financial and sales results hits the stock market and we get what we call sticker shock – where the realities of the economy hit stock market expectations.
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Take Trading Profits on Your ASX Shares
When the ASX was dropping with the COVID-19 pandemic our advice was to buy quality small caps and blue chips in small parcels. We hope our subscribers took our advice as the ASX has since risen with some good profits to have been made.
Our advice is now that we are in an environment where if you are making trading profits, our best advice is to take them.
What does the rise in uranium price mean and is it time to buy Uranium ASX Shares?
The uranium price has been going in the opposite direction to oil and is now up 31% amid shutdowns in mines due to the coronavirus. This does not mean you should jump on board.
We class this sector as the as risky end of risk assets. What we’re looking for are ASX listed small caps and blue chips where you’re leveraged to growth at less risk.
Also, we’re not talking about investing in uranium the commodity; these ASX stocks are mining the commodity and as such have single mine risk. As a general rule Under the Radar Report has a specific policy of excluding companies that have such risk.
You can spend your entire life chasing a winner in these sectors and you might get lucky. Under the Radar is focused on more robust investment propositions where you get the potential for great returns without excessive risk.
Current ASX Share Market Opportunities and ASX Stock Tips
Where do we see pockets of buying opportunity right now and where should people be cautious?
The ASX went from a momentum environment to stock picking as ETFs have gone from buyers to sellers. The dispersion of the share market has increased, which means that there is a bigger difference between the haves and the have nots.
Those in the former category include small caps and blue chips that don’t have excessive debt and companies that can trade on, even in the current difficulties. Some discretionary retailers who offer non-essential items are being bought on excessive optimism that there will be a V shaped recovery. We would be wary of chasing such small cap and blue chip stocks.
In this week’s Under the Radar Small Caps we look in depth at Kogan (KGN) and Kathmandu (KMD).
ASX Small Cap Stock Tips: Small Cap Austal (ASB)
We continue to believe that opportunities exist in “accidental tourists”, meaning those companies that have big turnover and brand recognition but are trading at small cap prices. The Small Cap universe now has more quality in it than ever.
One stock we continue to like is the ship builder Austal (ASB).
The Australian Government would need a very good reason to cancel any contracts for vessels, and the US Government has made clear that it regards building its vessels as an essential activity. This is more than 85% of Austal's revenue and earnings.
There might be some cancellations of commercial ferry orders, though management claim that all existing orders are good to go, and tend to be very well financed.
In the long term, if travel remains permanently reduced, commercial ferries will be less in demand. But the existing global fleet is not getting any younger, and ultimately will need to be replaced for safety reasons, so the long-term market trends are in the company’s favour, to some extent.
FINAL ASX STOCK MARKET COMMENT
Low interest rates make equities in general more attractive but that is only if those ASX companies are producing profits that you believe will keep rising into the future. No single company can guarantee that, which is why there is an equity risk premium. But if equity prices inflate in a hunt for better returns, the prospect of better returns disappears quite quickly.
Just as we advised to buy in small parcels while the stock market was falling we are now advising investors to consider taking some risk off the table by taking profits when opportunities arise.
Now, getting back to the oil price:
It reminds us of the BrisConnect debacle some years ago when investors in partly paid securities were on the hook for payments far in excess of the value of the underlying investment (something like 200 times).
In the same way, traders bought oil futures contracts and it turns out were getting calls asking where they wanted their oil delivered to. We’re talking a lot of oil where each contract is worth 1000 barrels.
Traders capitulated because the main delivery point in the US in inland, Cushing, Oklahoma. This also happens to be the place where the WTI price is formulated. There are only so many pipelines in and out and storage linked to that network is backing up.
While the WTI is negative, Brent, the international benchmark, lost 8.9 per cent on Monday to fall to US$25.57 a barrel, but is less immediately afflicted by storage issues.
A big WTI oil contract expires tomorrow, so it’s definitely a case of watch this space.