Precision Points: The cycle abides

News.com.au

03-07-2025

In Precision Points, Precision Funds Management executive directors Dermot Woods and Andy Clayton draw on insights from two decades on the front lines of equity markets to share their expertise with Stockhead readers.
For all the commentary on the stranger things of the 2025 stock market – the impact of Donald Trump's tariffs, the continued and illogical strength of ultra-high PE tech and financial stocks, and the booming value of gold and Bitcoin – some things remain the same.
That is, in the words of the Coen Brothers, the cycle abides, as far as Precision Funds Management's Dermot Woods and Andy Clayton are concerned.
While there are some unusual occurrences happening in the world of publicly traded companies, many elements of an archeypal investment cycle are still in tact.
"At the start of a market technology and discretionary, at the end of a bear market, its financials and stuff. That's been the second best performing sector and then technology runs, discretionary runs," Woods told Stockhead.
"It almost lines up perfectly with what's happened in the Aussie market."
That bearish market trend, which saw an all-timer run for ASX bank stocks, followed the first rate hike cycle in Australia in over a decade.
The cash rate has now been cut twice this year, with another forecast in July.
That could provide a catalyst to push the cycle along, bring more retail money into the market and power a return to form for materials (mining) and energy stocks.
"They should have their day in the sun. Every cycle is different. The unusual thing in this cycle, I guess, has been the gold price," Woods said.
"Which I guess is a reflection of the fact that no government in the world is pretending they need to balance the books anymore, so people don't want them to want to own their treasuries."
Retail return
The other feature of the recent market has been dramatic outperformance from large caps over small caps.
In the US, the enthusiasm for Magnificent 7 tech stocks has seen the top 10 in the S&P lift 116.3% over the past three years, versus just 27.3% for the Russell 2000 index.
In Australia the ASX 200 has inked a 46.4% three year return against 28.3% for Small Resources and 13.8% for the ASX 300 Resources index.
"As people feel happier about their balance sheets, I think people will come back to the market," Woods said.
"It gets the same benefit as the car sector, everytime somebody gets some equity back in their house, they feel happier about buying cars.
"It's the same impact across stocks as well.
"It does make you think, we deliberately had for us a negative view on commodities in 2022 because rates were going up and we could see that happening for a couple of years.
"So we thought they'd underperform the market and a lot of that's unfolded. Having said that alot of our industrial stocks still scream good value.
"(Rate cuts) make you feel more like buying non-gold commodities."
Performance on point
Precision recently wrapped up its FY25 numbers, inking a 13.1% gain, slightly above the 12.3% gain in its benchmark, the S&P/ASX Small Ordinaries Accumulation index.
Over a three year period, Precision has returned 18%pa, up to 19%pa over five years, with the fund up 209% since inception, against a 68% rise in the Small Ords and a cash return of 19%.
The biggest reporting periods of the year are on the horizon, with June quarterly reports and full year financials to follow one after the other in late July and late August.
Precision is looking for strong performance out of the contracting sector, where it has a number of investments, including Emeco Holdings (ASX:EHL), SRG Global (ASX:SRG) (Precision's largest holding as 9%) and Macmahon Group (ASX:MAH).
Stocks to watch
Emeco is one the Precision team is watching closely heading into reporting season.
The ~$450 million company is down around 5% year to date but 8% higher in the past month.
Woods says the contractor is at a "really interesting inflection point".
"It has to re-fi some debt, which it will do very easily because the gearing levels are very low versus history for that sector. And then it's printing off a lot of money, it's not invested a lot in growth capital because the market isn't rewarding it for it," Woods said.
"And it's grown to be a very, very illiquid stock. I think they'll do some capital management because they're trading at a 40% discount to NTA, which will be going up because they're generating cash, after reinvesting in their fleet."
Emeco could be an M&A target as well, with Woods saying the prospect of a trade sale to an overseas buyer like a North American firm is not out of the question.
At the smaller end of the market, Woods' colleague Andy Clayton has been doing some digging lately into Black Canyon (ASX:BCA), a junior which may be on the trail of a high-grade manganese discovery near the foreign owned Woodie Woodie mine in the Pilbara.
Met test work has delivered premium grade concentrate of 48-50%, the quality seen from South32's GEMCO mine in the Northern Territory, from drill samples at BCA's Wandanya discovery.
While Precision don't own BCA, they've kept an eye on it for "6-12 months", and the stock has doubled in the past month as a manganese and iron find has developed over two phases of drilling.
"They initially outlined a large low grade 10% manganese deposit and then he (MD Brendan Cummins) picked up this ground where the initial drilling looked like they've jagged some high grade 30% plus manganese ore that can easily be beneficiated up to 45%," Clayton said.
"They've just completed the second phase of drilling and it looks like they've extended that strike to over three kilometres."
BCA is capped at $25m.
" I think it looks really, really interesting because you've got potential size and grade. You've got the Woodie Woodie mine to the north, which is within the trucking distance, 70km or something close," Clayton said.
" This could easily be one that you wake up and it's a deposit that potentially has the scale."
Clayton says BCA has also been "run on the smell of an oily rag", with most cash coming into the company spent on the drill rig. A third phase of drilling is due in August, once heritage clearances come in.