Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In Part 2 of this edition, Katana Asset Management's co-founder Romano Sala Tenna reveals 4 ASX shares every investor should consider adding to their portfolio.
(You can find Part 1 of the interview here).
We covered the key criteria an ASX share needs to meet before you'll consider buying it in Part 1 of our interview. Flipping that, when do you decide to sell out of a share?
That's a harder thing. There's an enormous amount of work that's been done on theories of when to buy. When to sell hasn't received the same sort of air time.
We do try to look for a tangible change in sentiment as indicated by technical signals.
We can buy a company and it can reach its price target where we value it. But if the sentiment is strong –then we're prepared to hold the course on some of these stocks. For example, over the past year or two, we experienced tech stocks trading above their long term discounted cash flow valuations.
By the same token, when we see a break in sentiment, then we're prepared to take some off the table. We generally do that in stages, not sell the holding out in one parcel.
A good example is FMG [Fortescue Metals Group Ltd (ASX: FMG)].
We established a trade on the last pullback around $19 and sold half at $24.40 when the technicals were turning. We're close to selling the balance. We think the sentiment, based on what we're seeing, is probably turning down in those companies.
What was your best performing investment over the past 12 months?
Our number 1 contributor to benchmark outperformance over the last 12 months is Mineral Resources [Mineral Resources Ltd (ASX: MIN)], which is an ASX 100 company. It's a company we've invested in since 2006 and traded actively. Over the last 5 years, we've averaged 3.3% of the portfolio in Mineral Resources, but it's ranged from 0–8% over that time frame.
One of the things we do is get to know companies, very well. And then we take advantage of the month to month fluctuation in share prices,
What attracted you to Mineral Resource shares?
One of the things we really like about Mineral Resources is that they've got 2 real drivers from here.
First, they're looking to grow their production from 20 million tonnes per annum to 90 mtpa over the next 3-5 years. So even though we're expecting the price of iron ore to come down, that's going to provide a huge buffer in terms of volume growth.
The second thing is they have the largest hard rock lithium mine in the world, Wodgina, which is currently on care and maintenance and not contributing anything to earnings. But what we're seeing right now is that the market for lithium hydroxide and lithium carbonate is firming up quite solidly.
And we expect to see, in the not too distant future, that mine will be brought out of care and maintenance and back into production. And that could be quite a substantial revenue generator
You have a strong focus on risk management. Part of that involves your flexibility to move to higher cash levels if required. How did that play out in the lead up to the February 2020 crash and over the months that followed?
That's a great question and really comes to the core of what we do.
We were sitting right about at 20% cash in early February [2020]. And we were tracking COVID very closely from late December. But by mid-February, we still had no idea as to the magnitude of what was about to transpire and how it would spread.
What we were nervous about is that by late February the Nasdaq reached a record high, while we're getting very clear daily reports out of China that COVID was having a profound impact on one of their major factory districts. So we started to get the view that global supply chains would be notably impacted. And Chinese demand for a variety of goods and services, especially things that Australia produces, would be impacted.
It looked like the world wasn't giving this any credence. So, we started to move cash, around 35% in cash before the bottom fell out of the market. Ideally, we would have liked to have a bit more.
But by the 13th of March, I wrote a piece saying "now's the time to buy, because we've reached peak fear". So, we were down to about 7-8% cash by the third week of March.
We would have gone lower, but we were under the impression that there was going to be a plethora of capital raisings coming down the pipeline. And we wanted to keep aside some capital.
Nonetheless, it set us up for outperformance over the next 12 months.
What are a few top ASX shares you think our readers should consider adding to their portfolios?
We're watching gold closely to see if there's a confirmed breakout there. Gold share valuations are very good. If we get a confirmed breakout in the gold price there's going to be some good upside. We're not there yet, but we're watching it very closely.
I think Regis [Regis Resources Ltd (ASX: RRL)] is outstanding value. The acquisition they made was poorly timed and poorly priced, when they picked up 30% of Tropicana [gold mine] from IGO [IGO Ltd (ASX: IGO)]. Not poor as in a bad asset. I think that's a very high-quality asset, but I don't think they needed to do that when they diluted their capital base by so much.
But if you look at consensus analyst forecasts for Regis, now it's 6.5 times earnings for the coming financial year. And it's one of the highest paying dividend-yielding stocks in the gold space, with high free cash flow, and 2 tier-1 assets… I think that's the pick of the gold stocks at the large end.
On the small end, there are probably 10 gold stocks I could mention that are worth taking a look at. But there's a lot more of a speculative element to them.
You mentioned energy prices earlier. Do ASX energy shares stand out for you?
In energy, there's a massive disconnect between where the oil price and LNG spot prices are versus where a share like say Woodside [Woodside Petroleum Ltd (ASX: WPL)] is trading.
Last time the oil price was here, Woodside was at $34 per share. Now it's at $21.88 per share.
If you look at the LNG price, you can actually sell LNG cargoes in the spot market right out to March next year, almost 12 months out, at north of $10 per MBTU. If you go back a few months ago you're looking at $4.50–5.00 for spot cargoes. So it's in the vicinity of double that.
Now we could always be wrong. We could always see the oil price retrace and the LNG spot price retrace substantially. But I think it's more likely that we see a reverse there and a recovery in Woodside.
We've also been doing a fair bit of work in the copper space and finding ways to play that. Copper is at multi-year highs and could potentially push into record highs here.
Any other promising ASX 200 shares?
You also have to be looking a little bit to where most people aren't looking. We're trading Elders [Elders Ltd (ASX: ELD)] as a short-term momentum/earnings growth play. I still think there's more to come there.
And some of the shopping centre REITs [real estate investment trusts] are being treated like they're dinosaur assets. But we have a different view on that.
We actually see things like SCG [Scentre Group (ASX: SCG)] as being monopolistic assets. Imagine a 40-acre shop in the middle of your suburb; trying to replicate that asset just isn't physically possible to do.
As these centres continue to morph into life centres, I think there's going to be more growth than is currently forecast. And you're not going to be able to get 40 acres and get a Council to sign-off to build a competing centre. Who wants a shopping centre next door?
I think they're going to be solid long-term property banks that morph into lifestyle centres with great upside.
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(You can find Part 1 of the interview here).
