It is often darkest before the dawn, CSLA’s Damian Kestel noted of certain investment approaches, quoting English theologian and historian Thomas Fuller. Fuller was speaking of a religious transformation in his book “A Pisgah-Sight Of Palestine And The Confines Thereof,” a 1650 history of the Old and New Testament, spoke of torture and spiritual ecstasy. Kestel, for his part, is looking at stock market “animal spirits” that were tortured in 2012 but are now “flying too close to the sun.”
Damian Kestel – Australian miners are in a buoyant mood
Kestel couldn’t attend Australia’s premier mining conference, Diggers & Dealers, but the record crowd that did show – it was the highest attendance since gold was trading near $1,880 per ounce – couldn’t have been more buoyant.
It was in 1980 when the adornment metal topped out in price just above $2,000 per ounce, when it abruptly crashed. Likewise, in 2012, when gold was trading near $1,800, it ultimately found mean reversion. But since October 2015 it has been climbing higher, much like the mood at the Diggers & Dealers conference.
Using Oaktree’s Howard Marks quote as inspiration ““No market, niche or group is likely to outperform the others forever” — Damian Kestel looks for the concept to work in reverse. He seeks contrarian inspiration in an effort not to pile on in overexposed stocks and sectors that have already made it, but rather find the beaten down and disregarded stocks that represent tomorrow’s winners.
One focus of his attention is the Australian Small and Mid Cap Miners Index. The index is just off “very bad times,” after dropping from near 7000 in 2011 to fall to 1,300 to start 2016. When an investment has that type of fall from grace, it is worth noting when the rebound occurs, which has recently occurred taking the index just above 2,000, a near 60% climb.
The Australian Small and Mid Cap Miners are a beaten down sector that, with the aid of geopolitical tensions and the shrinking of central bank balance sheets, could be a winner, particularly during a crisis.
Damian Kestel – Invest in Cinderella, not the already popular sisters
There are a number of stocks that appear close to the sun while others are beaten down and have potential, like Cinderella, to rise.
Consider the fortunes of Tencent Holdings, for instance. At the start of 2012, the stock was trading near $31. The super-hot Chinese investment holding company operates in the equally white hot payment systems, smartphones, internet mobile phone services, media, entertainment and operate online advertising services.
The stock is now trading above $310, a profit of ten times since the beaten down days of 2012. But with a market cap of $2.96 trillion in an unusually wide array of business units, the price earnings ratio of 54.68 might indicate this stock is a little close to the sun, particularly if Chinese deleveraging gets out of hand.
A stock that might be beaten down is Astra Argo, an Indonesian palm oil company. The stock is trading at “rock bottom” multiples. After trading near 25,000 in 2012, now trades near 15,000 and could experience an earnings recovery.
“The way to make money is to buy when blood is running in the streets,” famous industrialist John D Rockefeller was famously quoted as saying. Damian Kestel notes this when he looks at India’s pharmaceuticals industry. In particular, he looks at Lupin Limited. The stock at one point traded above 2000 (INR) as early as 2016, but has since fallen to near 940.
Buy the beaten up stocks and sell those close to the sun, is the mantra of the day.