Companies with a market capitalisation between $300 million and $1.3 billion are broadly defined as mid-cap sector stocks, according to Shaw Stockbroking analyst Scott Marshall. But share price movements can easily move stocks in and out of the above dollar range.
Marshall says there’s more than 200 mid-caps listed on the Australian Stock Exchange, and, in line with the above definition, they are usually excluded from the S&P/ASX 100 index.
Of the 2000 or so companies listed on the ASX, Marshall says 82 per cent are relatively small, with a market capitalisation below $300 million. So volatility needs to be taken into account when comparing stocks in different market capitalisation bands. “There’s increasing volatility among stocks outside the S&P/ASX 200 so investing in them carries more risk,” Marshall says. “On our company forecasts, the 2012 price/earnings ratio for mid-cap stocks is about 14 times compared to 13 times for the broader market. But good value can be generally found in this sector.”
Marshall has established a list of value mid-caps that investors can consider adding to portfolios. In terms of market capitalisation, Lynas Corporation’s (LYC) stellar share price run has catapulted it beyond Marshall’s mid-cap definition, but it’s one he can’t leave out.
“On the resources side, we see great value in certain rare earth companies that have good resources in the coming period of global scarcity,” he says. “These companies include Lynas Corporation and Greenland Minerals and Energy (GGG).” Marshall says China currently produces more than 93 per cent of all rare earths globally, and its own internal demand has been rising exponentially. As a result, China, in the past four years, has dramatically cut exports of rare earths – a moderately abundant group of 15 metallic elements enabling digital technology among other things. In the second half of 2010, Marshall says Chinese exports of rare earths were cut by a massive 75 per cent. He says Australian companies control some of the better rare earth deposits. Lynas Corporation’s Mount Weld deposit is a clear example of a major future supplier. Greenland Minerals and Energy’s rare earths deposit in Greenland is one of the biggest in the world.
Roc Oil (ROC) heads Marshall’s list of mid-cap oil companies. He says the company is poised to benefit after CNOOC (China National Offshore Oil Corporation) approved the Beibu Gulf joint venture. First production is expected in late 2012, and Marshall believes the latest news hasn’t been factored into the company’s share price. Trading at 40 cents on February 9, 2011, Marshall’s 12-month price target is 60 cents.
Among the industrials, Marshall likes Bradken (BKN) for its exposure to the mining services sector. “Despite a lower full-year 2011 outlook for its rail division, the earnings recovery is otherwise on the way,” he says. Shaw Stockbroking is forecasting 18 per cent profit growth to $97 million in 2011. “Globalisation of its business model, which is immature, is progressing and management offers a solid track record,” Marshall says.
Of the biotech companies, Pharmaxis (PXS) is one to consider. “Pharmaxis is expected to have a great 2011 as its cystic fibrosis drug Bronchitol gains wider regulatory approval and sales,” Marshall says.
He expects Qube Logistics (QUB) to be a long-term growth story, as it positions itself within the transport sector. “The reasons we like Qube Logistics are because of proven management, including former Patrick Corporation managers, and it’s operating in a growth sector underpinned by the New South Wales Government developing strategies to encourage rail transport,” Marshall says. “It’s business model includes growing via acquisition, identifying investment opportunities in infrastructure to grow market share and reducing costs.”
Marshall says OrotonGroup (ORL), offering a quality brand portfolio and strong management, is one of his preferred retailers. “Oroton has weathered a poor retail environment over the past two years and has demonstrated a solid track record of enviable earnings growth,” he says. “We have forecast Oroton’s profit to grow by almost 11 per cent in 2011 to $25.5 million.”
|COMPANY CODE||ASX CODE||SHARE PRICE||MARKET CAP|
|Lynas Corporation||LYC||$1.97||$3 billion|
|Greenland Minerals and Energy||GGG||$1.19||$370 million|
|Roc Oil||ROC||40 cents||$290 million|
|Qube Logistics||QUB||$1.32||$670 million|
Figures relate to market close February 15, 2011.