It’s that time of year again when both growth and value investors can look to the performance of ASX 200 stocks for FY 2016 for potential investments. If you believe stocks on the way up will keep going up, the top five performing stocks of 2016 are worth a look. If you are a bargain hunter looking for fundamentally sound stocks that have fallen out of favor for a variety of reasons, the bottom five performers are worth a look.
Here, below, then are the top five and the bottom five stocks from the ASX 200 for the Financial Year 2016, along with growth forecasts and historical total shareholder returns.
Bargain hunters will be disappointed by the meager growth forecasts and poor historical performance of the bottom five companies. Biotech specialist in cellular medicine Mesoblast Limited (MSB) has been teasing and disappointing investors for years. As is the case with many innovative Biotechs, the company has been long on promise and short on performance. The 15% earnings growth forecast is deceiving as it represents a narrowing of negative earnings per share from a -$0.372 in FY 2015 to an expected loss of -$0.252 in FY 2017.
Cover-More Group Limited (CVO) and Spotless Group Holdings Limited (SPO) are newcomers to the ASX, debuting in 2013 and 2014 respectively. Cover-More offers travel insurance and travel-related medical coverage. The stock opened its first day of trading at $1.75 and has dropped 26% since.
Spotless Group started out with a single dry-cleaning store and now offers laundry and linen services to enterprises and facility services including catering and food services, grounds and waste management, and fire and security services. The stock also opened its first trading day at $1.75 and is down 29% since.
Origin Energy (ORG) and Orica Limited (ORI) both have long histories of less than stellar performance and equally dismal future prospects.
Growth investors have cause for optimism with most of the top five performers. A2 Milk Company (A2M) and Bellamy’s Australia (BAL) are also newcomers to the ASX with New Zealand based A2M dual listing on the ASX, beginning trading in late March of 2015 with an opening share price of $0.56. It has risen 234% since its debut. Bellamy’s began trading on 5 August of 2014, opening at $1.31. The stock is up 800% since. Both these stocks were on what seemed to be a never-ending ride upward until January of this year. Here is a two year price performance chart for these two companies.
The two companies have been riding the tidal wave of growing demand in China for quality baby formula. The abandonment of that country’s one child policy and the food producer scandals there have led to Chinese consumers increasingly looking to Australia for supply. Enter the Chinese government with plans to increase regulations for foreign food products imported to China via online sales. The proposed regulations appear to be complex, with increased tax revenue one of the objectives along with better food safety via fresh product registration for importers. Bellamy’s and A2M have a reputation for high quality offerings and should be able to weather this storm. Companies have until the close of 2017 to meet the new regulatory burden.
Analyst estimates for both companies remain strong. Bellamy’s reported earnings per share for FY 2015 of $0.109. Analysts expect EPS to increase to $0.38 in FY 2016 and to $0.64 in 2017. A2M showed an EPS of -0.03 in FY 2015 with growth in FY 2016 to go to an EPS of $0.04 and doubling to $0.08 the following year.
The top three performers for 2016 were mid-tier gold miners. The price of gold has been sliding for close to five years but has rebounded well in 2016. Here is a five year chart for gold.
As the price declined, miners everywhere looked to tighten their operations to lower costs sufficiently to remain at least marginally profitable. Some of the world’s largest producers sold their Australian assets at bargain prices. It should come as no surprise then that gold miners would perform well in 2016.
St Barbara Limited (SBM) and Saracen Minerals (SAR) were both admitted to the ASX 200 this year, with SBM in March and SAR in May. Moving to the ASX 200 attracts large institutional investors, some of whom are restricted to large cap stocks, as well as managers from funds that track the index.
If you were limiting your investment decision strictly to the numbers, St. Barbara and Saracen have better track records and better growth prospects. St. Barbara’s reported EPS for FY 2015 was $0.043. The expectations are for a staggering increase to an EPS of $0.27 in FY 2016 followed by another jump to $0.39 in 2017. Saracen’s 2015 EPS of $0.014 is forecasted to rise to $0.074 in 2016 and to $0.71 in FY 2017.
St. Barbara operates three mines, two in Western Australia and the other in Papua New Guinea. Three years ago the company began slipping into deep trouble and investors began to abandon the stock in droves. The turnaround began in 2015 and has not abated since. Here is the price performance chart for SBM over the last two years.
Saracen Minerals followed a similar path. Here is the chart for SAR.
Some investors forget that lower operating costs and higher gold prices are not the only tailwinds at the back of the gold miners. The lower AUD has helped as well. The following graph compares the price of gold in USD versus AUD since the turn of the century.
Gold in US dollars is around US$1340 today while in Australian dollars it’s around $1750. On 6 July St. Barbara reported record setting production levels. Earlier in the year Saracen Minerals reported it expects to double its production to more than 300,000 ounces per year. The company has all-in sustaining costs under A$1075 per ounce.
While the current environment is helping Australian gold miners across the board, SBM and SAR are leading the pack. Here are the two year earnings growth forecasts for some other major gold miners.
Newcrest Mining (NCM) +8.6%Northern Star Resources (NST) +58.6%Evolution Mining (EVN) +34.9% Oceana Gold (OGC) +26.4%Silver Lake Resources (SLR) +55.8%
While these are strong numbers, they pale in comparison to the earnings growth projections for both St. Barbara and Saracen. Surprisingly enough, despite the substantial run-up in share price, both SBM and SAR have reasonably attractive valuation ratios. St Barbara has a Forward P/E of 9.21 with a five year expected Price to Earnings Growth (PEG) ratio of 0.14. Saracen’s Forward P/E is 13.31 with a five year expected P/EG of 0.46.
Obviously the rosy future for gold miners will quickly dissipate should the price of gold descend into another tailspin. However, investors have historically flocked to gold in times of uncertainty, of which there is currently no shortage. Once again we are hearing wild predictions of gold rising to US$5,000 per ounce by 2020.
This prediction seems outlandish but a case can be made for a continued rise in the price of gold.
First, the global economy remains fragile, at best. The shakier the economy gets, the more investors will continue to pile into gold.
Second, we may see more interest rate cuts out of the ECB and the UK now that Brexit is a reality. Market participants anticipating a rate cut from the Bank of England saw the price of gold drop close to 1% when the Bank announced rates would remain the same. The US is unlikely to raise rates anytime soon and there are those who actually believe the US Federal Reserve could cut interest rates again, but perhaps 10%.
Third, the demand for physical gold continues to rise in India and Asia.
Fourth, bond yields around the world are at record low yields, with some sporting negative yields. Some experts predict the collapse of bond yields will drive the price of gold to new record highs.
US Bank of America/Merrill Lynch is predicting a 10% increase in the price of gold, approaching US$1,500 by year end. UBS is less optimistic, forecasting U$1.400 while HSBC raised its earlier U$1.205 per ounce to U$1.275.
Gold recently reached a two year high and analysts tell us ETF’s (exchange traded funds) backed by gold have seen cash inflows at their highest level since the post GFC stampede for safe-haven investment opportunities.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article.