Market Update & Important Indicators
Utility companies posted their best weekly performance since July as investors poured money into dividend-paying stocks. Major indexes spent most of Friday in the red before a buying spree in the last half hour of trading buoyed shares. The Dow Jones Industrial Average fell as much as 76 points before closing up 11 points, extending its streak of record highs to 11 consecutive days.
It's the longest streak of records for the index since 1987. A drop in government bond yields sent money into high-dividend stocks such as utilities. Utility companies in the S&P 500 rose 4% this week, the best weekly performance since the week ended July 1 for the sector, which boasts a dividend yield of 3.5%, according to FactSet. The drop in yields pressured banks. Lower interest rates can hurt lenders' profits by narrowing the gap between what they pay on deposits and what they charge on loans.
Financial companies in the S&P 500 lost 0.75% on Friday, putting their weekly loss at 0.1%. Morgan Stanley fell 2.3%, Citigroup lost 1.8% and MetLife fell 2%. The S&P 500 rose 0.15% on Friday, and the Nasdaq Composite added 0.2%. All three major indexes posted weekly gains.
Stocks and bond yields have risen since Election Day largely on expectations for pro-growth policies under the new administration. So far this year the Dow industrials have risen 5.4% while the S&P 500 has climbed 5.7%. During this period, trading volumes have been fairly muted. This year through Thursday's close, an average of 6.7 billion shares changed hands a day, according to WSJ Market Data Group. That falls far below the average 9 billion shares changing hands each day in the same period last year. In corporate news, shares of Hewlett Packard Enterprise fell 6.9% after the company lowered its outlook for the year and suffered a steep drop in quarterly revenue.
In Asian trading Friday, financials led declines in most regional equities markets amid falling sovereign-debt yields and another pullback in the dollar overnight. The Nikkei fell 0.5%, and the Kospi and Hang Seng dropped 0.6%. But China, which has been strong of late, outperformed, with the Shanghai Composite adding 0.1%.
In this Issue
Tox Free Solutions (TOX) | Construction tails off | BUY
Market Cap $439m | Current Price $2.27 | Valuation $2.60
The decline in resource construction volumes and a weak period for Worth Recycling (impacted by unseasonal weather) resulted in a weaker than expected 1H report card for TOX. We have pared back forecasts as a result, which has seen our valuation drop to $2.60 (prior $2.85). Despite disappointment in earnings we like the waste management industry and a diversification strategy which should set TOX on a long term growth path once shorter term resource construction jobs translate to longer term production contracts. Buy maintained.
Northern Star Resources (NST) | Eyes on the big prize at Jundee | BUY
Market Cap $2.6bn | Current Price $4.40 | Target Price $5.08
Northern Star Resources (NST) 1H result was in line with expectations with 1HFY17 NPAT of $104.6m (vs Argonaut $100m, +61% on pcp). The positive financial result, backed up by $61m growth capital investment in the first half and a growing cash pile bodes well for NST’s ambitions to increase production to 600kozpa. Argonaut believes that mid-2016 will be a positive inflection point for resource and reserve growth supporting the long-term growth aspirations of the company. Our recent visits to the Jundee and Kalgoorlie operations highlighted exploration and production upside at both assets. We maintain our BUY recommendation and increase our target price to $5.08ps (from $4.43 prior).
Peet (PPC) | Contract momentum into 2H | BUY
Market Cap $514m | Current Price $1.05 | Valuation $1.40
PPC’s 1H17 results were solid, and the business is well positioned for growth into the 2H and FY18. With a large, diversified land bank at a good cost base, PPC is under no pressure to restock, implying management can continue focusing on price, margin and cash flow. The significant exposure to growth corridors on the east coast, where there is still evidence of volume and price appreciation, is offsetting the weaker WA market (which will only deliver ~10% of earnings in FY17). There is upside to our forecasts and we maintain a buy call and a $1.40 valuation.
Recent Contacts & Presentations
Paringa Resources Ltd (PNL), The Gruden Group Ltd (GGL), Primary Gold Ltd (PGO), Vault Intelligence Ltd (VLT), Botanix Pharmaceuticals Ltd (BOT) Orthocell Ltd (OCC), Strandline Resources Ltd (STA) Dragontail Systems Ltd (DTS), ABM Resources Ltd (ABU), Acacia Coal Ltd (AJC), Troy Resources Ltd (TRY), Hazer Group Ltd (HZR), Berkeley Energia Ltd (BKY), Sino Gas & Energy Holdings Ltd (SEH), Sovereign Metals Ltd (SVM), Kin Mining (KIN), Vital Metals Ltd (VML), Mincor Resources (MCR), Dacian Gold (DCN), Leaf Resources Ltd (LER), Alchemy Resources Ltd (ALY), OpenDNA Limited (OPN), MZI Resources Ltd (MZI), Seafarms Group Ltd (SFG), Marindi Metals Ltd (MZN)