Portfolio Analysis: What Blue Chips are we picking?
The key reason the Blue Chip Value Portfolio is performing well is that the two big super sectors of resources and banks continue to generate positive returns. The big change was in 2022, where stocks based on jam tomorrow were aggressively sold off.
If you are interested in learning more about Blue Chip Stocks and how to invest in this area, read more here.
"Stock Picking is Paramount"
As the reporting season this month will reveal, the divergence between company performance is increasing. Stock picking is the key because investors are drilling down into the fundamentals to work out whether individual company profitability measures up. As the boffins say, duration risk has contracted. People want to see a line of sight at the very least to a company being cash flow positive. Dividend announcements will be highly regarded, partly because there is not as much technology on the ASX as there is in the US markets and also because it means cash in investor pockets.
Is there a Future in Iron Ore?
This week we cover two big iron ore miners, BHP Group (ASX:BHP) and Fortescue Metals (ASX:FMG). These are two companies where it literally pays dividends to listen closely to when it comes to the world’s second biggest economy. Much of the data from China is opaque and these are important trading partners.
Late last month, the Big Australian, BHP said it expects China to achieve its fifth straight year of over 1 billion of tonnes of steel production. More to the point, BHP says that China will be a stabilising force for commodity demand in CY23, but that developed (OECD) nations will experience economic headwinds.
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FMG's Iron Core
What is interesting about FMG however is that behind all the hype surrounding green energy and renewables, much of the group’s focus is actually on growing production of its core business, which is of course iron ore. This is easily forgotten.
FMG has cemented its position as one of the big four in delivering iron ore shipments. Delivering 49.4m tonnes in the recent quarter, annualised at 200m tonnes a year. This is set to grow with the first production from the 22m tonne a year Iron Bridge Magnetite Project commencing this year. Moreover, the product is high grade at 68% magnetite concentrate.
The iron ore producer is working on other avenues for future growth, commencing exploration drilling at the Belinga Project in Gabon, Central Africa; one of world’s largest undeveloped high grade hematite projects.
The Green Machine
Don’t get me wrong, FMG is also focusing on green energy through its FFI vehicle. For instance, the elimination of fossil fuel use at Fortescue’s Pilbara iron ore operations is expected to lead to savings of US$1bn a year by 2030.
Listening to the Market
It also pays dividends to listen to the other side of the equation, which is what the market is saying. To put it another way, what’s priced in at any given point in time in each stock.
Up until the end of September, most mining companies were generating high expected returns from our value based model. This was encouraging last year when it could have been easy to bug out of mining because sentiment was low. Fast forward to today and these stocks are rebounding. There is still value, but it’s much more differentiated. As I keep saying, we’re in a stock picking environment.
On the banking front, this is also the case. Back in September banks were all undervalued, with the notable exception of CBA. This remains the case, but the differential between expected returns has climbed.
One thing that hasn’t is that property markets remain the key, particularly residential housing. We are noticing that while prices have held up, volumes are noticeably low.
The Australian finance sector remains a growing market with increasingly attractive dividends. Learn more on how to time the market using greater insights to make a return.
What Does This Mean for Investors?
We have lightened our exposure to the banks, but we remain holders because they remain very strong in terms of capital management and dividend paying ability. Speaking of which, it is worth reading our note on APA Group (ASX:APA) and Telstra (ASX:TLS). These companies are at strategic crossroads, but have what all investors love – strong cash flow and growing dividends. Investors give companies more time to get things right when they can see a dividend stream.
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