The year just past was a crazy one. We saw the biggest viral pandemic of the past 100 years and we saw one of the fastest sell-downs in equity market history. Despite this, in the second half of 2020, we saw possibly the greatest equity rally in history. Globally stocks are at all-time highs and though Australian shares have lagged in their own recovery, if things continue as they have been, our shares will be at all-time highs shortly as well.
While we do expect a broad-based rally, with a rising tide, lifting all the boats, there will always be stocks that outperform their peers. Here is a list of interesting stocks that we believe have the potential to outperform in 2021:
APX.AX – Appen Limited
It was a rough end to 2020 for what was once one of the ASX’s biggest darlings. Appen downgraded earnings due to a reshaping of “the priorities and activities of our customers.” This downgrade was despite positive trends in online shopping and AI spending, which have historically been big drivers of Appen’s business.
Understandably there was a big selldown in APX, after all, what value is a growth stock with negative earnings growth?
However, the current low prices may present an opportunity if the company can get things back on trade, as most analysts project they will. If this happens, the current share price will look exceedingly attractive in comparison to its overpriced peers in the technology space of the ASX.
CIM.AX – Cimic Group Limited
Cimic had a shocked of a 2020 and to be honest, 2019 was also pretty poor for the company. Still, Australia’s largest construction company could be a big beneficiary of strong government spending and persistent strength in real estate markets.
Cimic has historically had issues through the us of supply chain finance to boost cash flows and an inability to recover debts in its Middle Eastern business. The Middle Eastern business in particular greatly contributed to the $1bn loss CIMIC reported in 2020.
The consensus is now that CIMIC will make profits around $650 million this financial year, which given the current market capitalisation of $7.5 billion, would put them at a price/earnings (P/E) ratio of just 11.5, which is exceptionally attractive given the market average P/E is more than double this at the moment (with P/E, lower numbers generally indicate cheaper prices).
FMG.AX – Fortescue Metals Group Ltd
2020 was a huge year for iron ore giant Fortescue. The share price more than doubled with iron ore prices skyrocketing. However, despite the share price gain, Fortescue still looks exceedingly cheap in comparison to the rest of the ASX.
The reason for this is that for more than two years now, analysts have forecast that iron ore prices will fall. As a result, their price forecasts for Fortescue have consistently been lower than the prices that Fortescue has traded at. For more than two years these analysts have been wrong.
Iron ore prices remain extremely strong and they don’t even have to rise further for Fortescue’s share price to continue rising, given that it remains exceedingly cheap on a price-to-earnings, price-earnings-growth, and dividend yield basis in comparison to the rest of the market.
SFR.AX – Sandfire Resources Limited
At some point the market will fully wake up to the opportunity that Sandfire represents. Perhaps 2021 will be that point. We got a taste of possible future realities on the 1st of December, when SFR went for a run on the back of positive announcements regarding their Black Butte (USA) and Tshukudu (Botswana) projects. Even without these two highly exciting projects, the company appears to be exceedingly good value.
Currently the stock has a market capitalisation of around $950 million AUD, with cash reserves of $304 million and no debt; which values their remaining operations at roughly $650 million. They made a $74 million profit last year on their one operating site: DeGrussa in Western Australia. Paying $650 million for this site alone appears a reasonable valuation already and doesn’t factor much value in for the Black Butte an Tshukudu sites.
In 2021 if Sandfire better illustrate the potential future value of these additional projects, we could expect much upside to the share price.
These are just some of the ASX stories we are keeping an eye on in 2021. Thankfully we can use our Emerald Equities screeners to find other exciting prospects as they appear through-out the year. As part of an Emerald Equities membership, you not only find out what stocks we are interested in but also gain the exact timing in which we are buying and selling.
If you have an interest in the stocks mentioned, or you’d like to discuss any other ASX listed stocks, don’t hesitate to contact an Emerald Equities advisor on 03 8080 5777 or click here to find out more about our research offering.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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