Richard Hemming, Editor of Under the Radar Report talks about the potential impact of a Trump trade levy; where to make money on ASX listed Small Cap Shares and Speculating versus Investing.
What do the potential tariffs on steel and aluminium mean for us?
The US potential to raise tariffs on steel and aluminium isn’t big on its own, although it does further increase pressure on higher interest rates, which we have been consistently mentioning.
We think that there is a low possibility that a country will escalate against this and it’s significant that China is not a big exporter of steel. There is a problem for Canada and Mexico, which makes NAFTA discussions interesting. It opens the door for this unravelling, which would be akin to Brexit.
Big Cap Report: Big Cap Portfolio
In our big cap portfolio we’ve got big positions in utilities like Sydney Airport, Lend Lease and APA, which we talk a lot about.
In the small caps world it places more emphasis on buying stocks cheap and being patient, which is our mantra.
Are any Under the Radar stocks affected?
We spoke so Tony Dragicevich the CEO of Capral Aluminium recently, who was relatively sanguine about protectionism. Although the US significant consumer – 30% of world market; tariffs in US would primarily to support the smelters. The measures against extrusion – semi-finished aluminium billet not as great. This is what Capral produces for the domestic market.
If the LME aluminium price goes down it would be good for Capral; but increased dumping isn’t a positive.
We think that power prices are probably more important to Capral in the short-term
What are some of the takeouts from reporting season?
Value hunting or another way to describe it, stock picking, is the way to generate consistent strong returns. This is what happens when interest rates are on the rise.
Capral (CAA) and Gale Pacific (GAP) are two manufacturers where we have been seeing value; they’ve faced headwinds and got their cost bases down. Cheap for a reason, though.
We would rather be paying PE of 10x and dividend yield of 5% than PE of 25, which puts you in a momentum situation.
Is the market overall expensive?
Yes it is, as we mentioned in our last market run-down.
Stocks that are expensive get punished when they don’t meet expectations.
This is important to state, because in the market overall, we’re getting to the stage where there are a lot of go-go stocks trading at eye watering valuations that make you wonder whether it’s possible they have any chance of meeting expectations. And it’s clear that some of these “go-go stocks” are unravelling.
GetSwift; Big Un; Buddy Platform
We’re seeing a number of software/technology companies unravel. These always are a big risk from a financial stand point because they capitalise R&D; and there are low barriers to entry. There is the potential to become stranded.
The danger in the franchisee model is for all to see. Domino’s Pizza and Retail Food Group have been hit hard.
This all goes to show that at a certain point achieving growth over everything else doesn’t work
What is the difference between speculation and investing?
Some of the stocks we recommend are more speculative than others. At the speculative end, we’re referring to companies whose prospects are somewhat binary. They can double; or they can halve, in some cases. We just the risk return relationship here.
Then you have stocks that we regard as investment grade. These companies are producing dividends, or will be producing dividends in the not too distant future. You are investing in a business at a reasonable price and you are looking at maintaining that for at least a few years.
We don’t advise that subscribers have more than 12% of speculative stocks in their overall portfolio.
What’s coming up?
High Performing Dividend Stocks and Lithium and Gold Stocks
We’re finishing off the results season; we’re updating our high performing dividend portfolio; and we’ve got some reports on the lithium stocks and gold stocks coming up.
What more would you want?