Hard assets are going like hot cakes
Inflation fears might be coming off but what we’re seeing is investors hunting for hard assets, so get ready to find out how you can profit. Hard!
Hard assets being bought and sold at increasing rates including investment properties and companies. Last week BHP made a bid for the copper producer Oz Minerals, but the vast majority of the action is in small caps, which I define as stocks with market valuations less than $500m. This week, six stocks that we cover are involved in takeover activity.
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Six Takeover Stocks
Tassal Group (ASX:TGR)
Let’s start with one of my favourites, Tassal Group (ASX:TGR). This really does come back to real assets, with its licence to fish for salmon in Tasmania, worth even more now that the government there has restricted the market to existing operators. It also has pens that it has spent a great deal of money on – its capex programme was $350m over 3 years, way in excess of normal. Plus it has a growth option in prawns. All these things the Canadian aquaculture giant Cooke wanted. Now they’ve had to pay up, increasing their bid 15% or so over the past months.
Alliance Aviation (ASX:AQZ)
Alliance Aviation (ASX:AQZ) has built up an asset base of Fokkers, which are hardy planes and targeted the FIFO market. Now its broadening out its business to 14 more planes, this time it’s Embraers. Look, Qantas might not end up with this company if it gets blocked by the ACCC, plus it’s got teething problems as it goes for growth. BUT it’s building its asset base, which is ultimately what counts when there is demand. There is debt, but let’s see what happens on the takeover front.
The aerial surveying specialist Nearmap (ASX:NEA) has had a rather volatile run because it is going for growth. This company’s assets are not as “hard” as AQZ’s, being imaging, its data base, but the point is that they are hard to replace. Creating them from scratch would take a long time. This week a specialist private equity firm made a bid. Why did it do this? Because this company is on the cusp of getting scale which means achieving a base of operations that ensures that marginal sales go straight to the bottom line.
Mayne Pharma (ASX:MYX) & Reckon (ASX:RKN)
Mayne Pharma (ASX:MYX) this month sold a division for US$475m (A$679m). This situation is similar to a what happened with accounting software firm Reckon (ASX:RKN) earlier this year. Both sold a hero asset and have growth engines remaining. Both also returned 50% in a short period and the question is always whether what’s remaining is worth holding on to.
Genex Power (ASX:GNX)
Then there is the increased bid for renewables asset owner Genex Power (ASX:GNX) by a consortium which includes the power couple of Atlassian co-founder Scott Farquhar and investment banker Kim Jackson. This follows close on the heals of the bid for AGL Energy by parties involving Mike Cannon-Brookes. Say what you like about the Atlassian co-founders, but they know the value of a good hard asset!
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What are hard assets?
I would describe them as assets with income producing potential, which adds up to returns that are over and above forecast inflation, expected to climb to 7.75% by the end of the year in Australia and running much higher elsewhere.
Investors are chasing hard assets because they don’t want to fall behind in the future. Think how hard it is when you have only financial assets and you’re trying to buy a house in a rising market.
I mentioned investment property above, but you’ve got to remember that for many, most wealth is tied up in their house. You also have your own income potential, but to reduce risk you need a variety of assets. The big learning in investing in the past 20 to 30 years has been the value of diversification: getting income from a variety of sources reduces your risk of capital loss.
What do equities do?
They help you maintain your living standards over time. The markets are cyclical, but stocks are geared towards growth; some achieve this better than others at different times. The key is that many assets have been built up by companies during periods of low interest rates, meaning the funding was as close to free as it gets. Now that interest rates are going up, they are hard, and sometime impossible to replace.
A good guide is to look at some of those stocks that are under takeover. There are more opportunities to find takeover targets in small caps simply because there are so many more of them and they are more digestible for big corporates/private equity.
To read in more depth about ASX Gold stocks click here.
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