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The Groundhog Index

The ASX200 index has found itself back at the starting line for the year. Fundamental value in some stocks has been steamrolled by circumstances beyond management control. Where are the opportunities and threats?

The resources market continues to suffer a big hangover from the investment boom as commodity prices slip further.

The carnage in the smaller iron ore stocks is a consequence of the big squeeze being put on by BHP and RIO who need to produce as much ore as they can to optimise the massive expenditure on expansions. And why wouldn’t they?

Even Fortescue Metals, producing comfortably north of its nameplate capacity of 155mtpa, is doing everything right operationally yet has been carted out by the plummeting price of its commodity. FMG has a world class business with room for expansion, greater cost efficiency and an improving balance sheet.

The catalyst for a reversal of its share price malaise will be the stabilisation of the iron ore price but it’s a lottery when that might occur. If you have the cojones, accumulating FMG on the way down will look good in your portfolio a year from now.

Don’t forget the lurking tailwind that will come from a lower Australian dollar for all exporters and those companies with significant offshore earnings such as Amcor.

If the resources companies have a hangover, then the mining services industry must surely be in an induced coma. Orica’s annual result wasn’t too flash and it sold its chemicals business for a song. Orica gloomily said it doesn’t expect any significant improvement in the resources market.

Seven Group, which backed the WesTrac business into its portfolio a few years ago, issued a profit warning saying it is finding it hard to sell Caterpillar trucks and parts. Seven Group also owns a chunk of Seven West Media which issued its own profit warning based on weak advertising markets last week. A double whammy.

Although the apparent blue chip status of BHP and RIO has limited the damage so far, neither stock has brought home the bacon for investors so far this year being down 15% and 16% respectively.

In contrast, the healthcare sector has injected itself with some miraculous elixir that has seen several IPOs enjoying PE ratios in the sunny 20s. Medibank Private is headed the same way following a heavily promoted and carefully stage-managed process that will see institutions paying a nice premium to the public cap of $2.00 per share (looking like $2.15). That will ensure a ‘Commonwealth Bank’ effect where everyone becomes a winner including the government after it pockets a nice cheque.

Fresh from reporting annual profits totalling $28.6 billion or 8.9% ahead of last year, the big four retail banks remain the default destination for SMSF (selfie) money. With an average fully franked dividend yield of 8.3% compared to a 12 month term deposit rate of 3.2%, there is strong logic for lofty bank valuations to be politely ignored.

Telstra has been grinding away at leveraging its leading position in broadband, mobiles, spectrum and network capability. It certainly doesn’t hurt to have a Marilyn Monroe sized dividend to attract attention either.

The search for yield has widened considerably to the extent that companies that can afford to pay generous dividends are not only well supported but seem to be less volatile than the broader market.

The insurers have stepped up in this regard with Suncorp in particular tossing around the candy having largely sorted out its bad bank problem.

The battle for the consumer dollar this year has no clear winner.

Supermarket wars have kept prices and inflation in check allowing consumers to fill trollies a little higher each week. But Woolworths has lumbered itself with a Herculean task of building the Masters home-maker business into something akin to the Bunnings goliath owned by Wesfarmers. Good luck with that, we say.

But Wesfarmers may be running out of steam on its own food and liquor strategy. The resurrection of Coles has fewer low hanging cherries and the discretionary businesses at Target and Kmart are struggling as much as any retailer. All the value and growth is in Bunnings.

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