Monday, 27 February 2023

SUNDAY ROAST: The small caps that lit a fire under Stockhead’s experts this week

by Berkeley Lovelace

Barry FitzGerald

BHP, the second biggest owner of nickel resources in the world, says the worst case scenario for nickel would see demand for it “only” double by 2050.

If we’re to meet climate change targets, you have to assume “double again”. That’s part of the reason BHP just shelled out $9.6 billion for OZ Minerals, owner of the $1.7 billion West Musgrave nickel-copper project in WA.

Unlike the other “transition” metal copper, nickel is on the move, up 14% from its December half-year average of $10.73/lb to US$12.21/lb. Fitz reckons that’s “a good US$5/lb” more than developers need to get really cracking.

He’s got two junior nickel hunters in his sights, chosen because they’re sitting on resources large enough to keep them going through not just years, but decades.

Aston Minerals (ASX:ASO) was trading at 9.9c mid-week for a market cap of $110 million. Its Edleston project in Ontario delivered a 1.5 million ounce gold resource in January that “may or may not be sold”, Garimpeiro says, so Aston can concentrate on the main event– the Boomerang nickel-cobalt discovery.

It’s low-grade (0.27% nickel), but it’s also big – 1.04 billion tonnes for 2.82Mt of contained nickel. That’s already one-third the size of BHP’s total resource base in the metal, and exploration’s barely begun.

With hydropower on site, it’s also kinda green – and the Canadians love that.

And then there’s Centaurus (ASX:CTM), trading midweek at $1.04 for a market cap of $445m. It was just a $25m company back in August 2019 when it picked up the Jaguar nickel project in Brazil from Vale.

It’s knocking on the door of a growing its nickel deposit to 1 million tonnes (grading 0.87% nickel), and on track to become a 20,000tpa nickel-in-sulphate producer. A feasibility study is due mid-year, with a final investment decision expected in late 2023.

Taylor Collinson

Looking for two under-the-radar financial stocks that could outperform the market?

Last week Taylor Collinson put out Outperform and Market Perform recommendations on a couple of ASX financial stocks that it thinks are setting up for a solid year or three.

The Outperform went to NobleOak Life (ASX:NOL), a Sydney-based $150m capped insurer that provides coverages including life insurance, income protection, permanent disability and small businesses insurance.

Taylor Collison reckons NOL’s current $1.80 price is good value, and set a 12-month price target of $2.14.

Why? We guess you’d call it “quality clientele”. For starters, NOL’s claims have averaged only ~20-30% of annual premiums, compared to the national average of 50%. That suggests to Taylor Collinson that NOL is underwriting at a higher quality.

Then there’s NOL’s lapse rate. The lapse rate measures the percentage of an insurance company’s policies that have not been renewed by customers. NOL’s comes in at 4-5% lower than its peers.

Again, Taylor Collison sees that as a result of a solid screening strategy… as well as NOL’s strategy to target a younger audience. One that has grown from 15,000 lives insured to more than 100,000.

Then there’s $1 billion capped Omni Bridgeway (ASX:OBL) with its team of around 200 specialists in law and finance, working for individual claimants, law firms, corporations, and sovereigns. It runs a “niche” business of financing and investing in litigation, dispute resolution and enforcement matters, all over the globe.

Taylor Ellison predicts that Omni will generate a loss for H1, but that means “possible buying opportunity” ahead of what could be a much-improved FY24. It had a strong Q2, is sitting on $200m cash, and has access to undrawn debt capital of up to $100 million.

It gets the Market Perform recommendation.

It also has has “a high barrier of entry that prevents competitors from replicating its footprints and brand presence globally”, which leads us to…


A term originally coined by the Oracle of Omaha Himself, Warren Buffett, a corporate “moat” is all about the ability of a company to fend off competition and make a profit significantly (and durably) higher than the cost capital.

Simple examples would be companies that hold exclusive patents, or for a unique reason, can offer the best value for a given price.

Investing in moats is a popular investment strategy. Morningstar even has an Economic Moat Rating of ‘wide’, ‘narrow’ or ‘none’ for each company it analyses.

VanEck has an ETF based on it, called the Morningstar Wide Moat ETF (MOAT). It’s comfortably outperformed the S&P 500 since December and it actually managed to touch a new record high in the last week.

And right now, Van Eck is happy to name its three favourite Wide Moat stocks.

Salesforce (NYSE:CRM): The cloud based software company’s stock is up over 21% in the last month. Its wide moat arises primarily from switching costs, with support from a network effect as well.

Dan Romanoff, senior equity analyst at Morningstar, reckons while revenue growth “is likely to dip below 20% for the first point in the next several years”, ongoing margin expansion “should continue to compound earnings growth of more than 20% annually for longer”.

Boeing (NYSE:BA): The legendary airline business has a wide moat due to its intangible assets (“technical complexity of its products”), and switching costs (“time and effort the military faces to switch suppliers”). Not to mention a notable lack of viable alternative suppliers.

The stock’s also just landed an upgrade from Credit Suisse to Hold from Sell.

Alphabet (NASDAQ:GOOGL): Morningstar recently said Google’s parent is undervalued at US$96.94, and has a US$160 fair value estimate on the stock. Its wide moat comes courtesy of its fairly obvious intangible assets, and a strong network effect.

“Alphabet dominates the online search market with 80% plus global share for Google, which it generates strong revenue growth and cash flow,” Morningstar senior equity analyst Ali Mogharabi said.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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