Three Targets for BHP…or Tesla

Three Targets for BHP…or Tesla

Are you getting excited yet? You should be.

The big drawdown in Aussie stocks is making a whole lot of shares look crazy cheap. I have to hold back the temptation to load up all at once.

I saw a statistic that said the Aussie market, including dividends, was down 6% in the ‘22 financial year just gone.

Someone reading a history book 10 years from now will likely shrug that off as a blip.

The reality for many investors and traders is much, much worse.

The last six months have been some of the most difficult I’ve encountered.

Good news didn’t matter a damn, mostly. Many stocks are down 40–60%. Some more, some less.

You know the reasons: inflation, rising rates, war. Here’s the reality check. None of these things are unique in the history of shares.

We’ve seen them all before. None of them stopped the relentless march of shares higher over time.

I don’t see why the next five years will be any different. All I really see, from a distance, is cheaper entry points everywhere.

Could the market have one more leg down? Sure.

In fact, that’s what I expect, rightly or wrongly.

But you and I aren’t looking to hold a stock for the next three months, right? By buying now, we want to know what we might achieve in 2023 or 2024.

There’s a known tendency for investors to focus on what’s happened recently. Falling share prices make it emotional and acute. It really does seem like the world is going to the dogs.

That’s why bear markets usually end in capitulation. We just, as a group, can’t stand to take it anymore and sell out — usually at the worst time.

Hopefully you won’t follow the herd on this front. Better to think like a strategic investor. I saw an example from one enterprising company this morning.

ASX-listed firm HMC Capital announced it’s after cash to bankroll a new fund. Here’s the quote that I liked:

Economies and markets are moving into a new phase that is highly uncertain. While a natural instinct in this environment is to allocate to cash or do nothing, we believe that attractive opportunities are now emerging.

I agree. You’re supposed to buy when valuations are depressed…as long as you take a medium- to long-term view.

Here’s an observation. The macro background is worse than the company reporting I’ve seen recently. That may change come August.

But it gives me confidence to back the market when I see volatility take shares down.

I saw one report comparing today’s market to the train wreck of 2008. I don’t believe the two periods are equivalent — yet.

2008 was a real estate collapse that imperilled the financial system. Aussie home values may be coming off the boil now, but we are not yet at the equivalent period of 2007.

If you go along with that line of thinking, it begs the question: which stocks to buy?

One idea might be to take your cure from Andrew Forrest — Australia’s richest man.

His fund was looking to acquire 15% of gold miner Regis Resources [ASX:RRL]. They couldn’t get the deal done, but it’s a line into his thinking.

The gold miners have been utterly smashed since August 2020.

It’s not unreasonable to think they can come back in a big way once the WA labour situation stabilises, and if we see a kick from the moribund gold price sometime soon.

It’s not as if the nature of the best deposits or the teams running them have changed.

And don’t forget lithium.

Pilbara Minerals [ASX:PLS] came out last week with a ripping update. Production was up last quarter, and they’re still shipping out at high prices.

That’s not all…

Lithium developer Liontown Resources [ASX:LTR] announced last week that it now has a secured contract with American auto giant Ford. You can see it for yourself here.

That’s stuck out like the proverbial for me. I just put together a presentation called Elon’s Chosen One.

The idea is that Tesla will buy up the available battery mineral supply in Australia. But the space is open for Tesla’s competitors to move in to — which Liontown just proved.

Analysts are thinking the same thing about BHP too.

The Australian Financial Review reported this morning:

Analysts reckon that if a recession were to hit and dampen demand for commodities and listed miners’ valuations BHP’s the one that could use its huge firepower to pounce.

The company isn’t facing any existential threats, but there’s only so far that any dividends, buybacks or organic growth can go…

Analysts reckon BHP management is focused on copper and nickel, but it’s still thinking how to play lithium.

While BHP used to think lithium was a pond too small for big fish, the market has grown substantially.

See what I mean? The big players, with cash to hand, don’t get spooked in the same way an Aussie punter might when the market goes down. They big guys can all go shopping instead.

Don’t forget, too, that the biggest criticism of Rio Tinto is that it has no ‘growth’ plays to complement its cash machine iron ore business. They must be analysing opportunities here too.

For my three best ideas on Tesla’s — or BHP’s — next ‘Chosen One’, go here now.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia