Precision Points: Stockpicking and fundamental value still keys for the patient investor

News.com.au

a day ago

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.
The world is heading increasingly in the direction of passive investing, ETFs and index tracking portfolio management.
That lines up the capital held in major institutions, especially the super giants responsible for managing the retirement savings of millions of Australians, more closely to the momentum of the market.
But fundies say there is still a role for stockpicking.
Precision Funds Management's performance over the past month is a case in point, with portfolio managers Dermot Woods and Andy Clayton pointing to double digit gains, beating the performance post-Liberation Day of the broader market.
They say the worm has turned outside the gold space, with a number of long-held conviction bets paying off.
"The market's broadening out all of a sudden. There's a little bit of breadth to the rally which is interesting because any time we've had an indicator of that really in the last year or so, that's immediately been murdered," Woods said.
"You can sort of smell the animal spirits returning to the smaller cap space and (investors) being a bit more open minded."
One of the key triggers has been declining interest rates, with cuts in February and May taking the RBA cash rate to 3.85%, the lowest level since May 2023.
"What benefits most from declining rates? All the gold guys will tell you it's gold because everything's good for gold for gold bulls," Woods said.
" But what it's really good for is base metals and property and old fashioned cyclicals – contractors and things like that."
Success stories
Among the key contributors to Precision's performance in May were property sector stocks Cedar Woods Properties and Australian Finance Group (ASX:AFG).
They've lifted a respective ~25% and ~22% over the past month.
Cedar Woods is a small cap developer with around 9700 lots planned across 37 residential developments in WA, Victoria, Queensland and South Australia.
AFG, meanwhile, is a mortgage aggregator, which recorded an 18.5% lift in mortgage lodgments for the third quarter of FY2025, its highest on record at $24bn.
Woods said Precision had held the trade for a couple of years.
"It's a patient trade really," he said.
"Part of the reason we were happy to sit with a patient trade in property rather than say lithium is we're getting paid a dividend.
"That's 2 or 3 times cash rate sitting there. And there's proper fundamental asset value that we look at, certainly in the case of Cedar Woods.
"We bought it for the two things that are happening now, which is lower rates and stupid government kneejerk policy to bribe the electorate."
The other, more recent trade, that has worked out has come in the base metals space, where copper miner Sandfire Resources (ASX:SFR) has quickly returned to all time highs within five weeks of being sold off to 12 month lows in the week of market mayhem following Donald Trump's tariff policy reveal.
LME three month copper prices fell to US$8590/t on April 9, when SFR shares hit $8.15, but they've sharply rebounded to US$9635/t by May 8. There's been genuine market tightness behind that run.
Copper smelters have spent most of the year paying miners to treat their concentrate because supplies are short compared to refining capacity in China, while at just 83,000t copper metal stockpiles in LME warehouses are their barest in two years.
"There's always pockets of overvaluation. There's always pockets of undervaluation. And the one that we spotted two years ago was definitely property. It has taken two years to work to work out," Woods said.
"The one we spotted two months ago was copper. We didn't think that would happen (in only) a month and a half."
Fundamental value
While sectors with strong momentum can make money at the right time of the cycle – gold miners and developers are a case in point right now – Woods and Clayton said they liked to look for stocks that offered fundamental value, which protected downside risk if the market turned.
They're wary on gold and view a number of companies in the space as overvalued right now.
But those which have long term cashflow generation and production growth in full view, like West African producer Perseus Mining (ASX:PRU), still ring true.
"A lot of (gold stocks' prices) is influenced by what happens on the (passive ETFs) GDX or GDXJ overnight," Clayton said.
"Which is why Perseus is one of our key holdings. We think ... fundamentally they're cheap."
Precision thinks Perseus is unique, given it has two-three growth assets all of which can be funded through internal cashflows.
"They're generating US$150 million a quarter in free cash, plus they've got growth," Clayton said.
"They bought the Nyanzaga asset (in Tanzania) off OreCorp. They've just done FID on that. And they'll be arguably ... plus 600,000oz by FY28.
"They have good, long life reserves at all their key projects.
" Compared to the Aussie guys that's, I would say, probably trading 50% less than a comparable 500,000oz producer."