David Shapiro: ‘There’s rich picking in some of the small caps’

Expert market analyst David Shapiro joined the BizNews Power Hour for yet another insightful discussion on Mr Market’s latest movements. Most prominently discussed was Anglo American and BHP Billiton’s sale of its Colombian thermal coal assets to Ivan Glasenberg’s Glencore for R8.3bn, which Shapiro believes makes all three companies look attractive. Also on the line was veteran mining analyst Peter Major. Both experts gave Glencore’s purchase the thumbs up. Shapiro, a ‘commodity optimist’, believes that those companies that ‘sell a machine that makes a noise or needs big tires’ are those that are going to benefit and is particularly impressed by Afrimat, Raubex and Invicta – to name a few. – Nadya Swart

David Shapiro on Glencore’s R8.3bn purchase of thermal coal assets:

I like all three for the various exposure. So I think you’ve got to have BHP, you’ve got to have Anglo’s and Glencore – simply because of the different areas in which they’re invested. You know, Peter [Major] is still around (or hopefully), but I’m very optimistic on where commodities are going to go. And while Peter’s still listening; there’s something that I read on the weekend, which was in the Telegraph, in fact, about the amount of investment that is being forced on motor manufacturers because of the demand of consumers – not the demand of manufacturers, not the demand of governments, but the demand of consumers – to go into electric vehicles. So that itself is triggering a huge demand for battery power and obviously copper and other areas as well. And this is big stuff because every motor manufacturer has to retool their factories. So, you know, I’m just interested in where this is going – my being too optimistic or is it going to fizzle out?

Peter Major on whether we’re seeing an opportunity to buy commodity shares:

It’s not an easy call, Alec. They’ve all pulled back from their highs because commodities on the whole have pulled back from their highs. But these shares, BHP Anglo’s in particular; they’re discounting that commodity prices fall a lot more a lot sooner. And we haven’t seen the rampant crazy expansion in acquisitions like we’ve seen every darn cycle since I was a kid in the early 60s. We just haven’t seen it. It’s almost nowhere evident out here. It’s amazing. It’s like they listened to Ivan [Glasenberg] last time all these shares turned down. So, these companies are less risky on the downside of a cycle than I’ve ever seen them before, because usually they are so stretched with debt, with huge CapEx problems, with acquisitions – so when it turns down, that just compounds the reason the shares fall. They don’t have that now. They’re all maximising their current asset base. They’re doing their best on cost control. But you are investing after close to a two decade run in commodities. And just look at the 70s; commodities didn’t even run for 10 years in the 70s, but they fell from 1981 until 2001 – up seven, eight years, down 20. We’ve had, pretty much, an 18 year up – so we could easily just slide down another 10 or 20 years. But if we slide down gradually, these shares won’t drop much, but they will trade on these continued low P/E’s. You know, look at the S&P – it’s on a 45 P/E and (what) Anglo and Billiton [are] on fourteens. So the market’s really saying; ‘We think commodities are going to fall a lot harder and you guys are going to do a lot worse.’

Shapiro on whether he would sell his shares in exponential (technology) companies to buy commodity shares:

No, I think they complement each other. Listen, I’m not over enamoured with Biden’s infrastructure plan – you know, $600bn spread over 50 states is not going to do much. But he did do a bipartisan deal, and I think this is going to trigger a lot more investment in commodities. And, China has been the main driver of commodity prices. I just see it balancing out. But I’m particularly interested in what’s going to happen in maybe the rare earths – maybe nickel, maybe copper – for electric vehicles. Maybe it’s not that big, because I don’t know what amount of commodities go into motor cars. But what I do see is a mammoth rush to build geiger factories (or whatever they call them, I don’t even know what that really means) in the UK or wherever to build batteries because the demand for batteries is going to be so big. So I see (with that) a different type of investment that we’re going to see in commodities. So, I think there’s a nice balance there that we’re going to participate in. And, you know, what Peter says we lived through – and I think I’ve repeated this on the program before, and Peter was there – where, you know, in the 70s and 80s, in those periods, you had to be a pretty good miner to survive. And I don’t mind that. I don’t mind if we go into a period like that rather than commodity prices falling in a heap. So I think we can find areas in the infrastructure development area and in commodities where I think we can do pretty well. And Ivan’s giving us a lead. You know, he’s going for it.

Shapiro on whether he’s enthused (similar to Piet Viljoen) about certain pockets in the JSE that are becoming attractive:

I am very much so. And you know where it is? It’s mining related, because we are digging more holes and we’re doing a lot more blasting. Whatever it is. It might not be evidence, but it’s going to come across – you saw Invicta’s results are out. I’ve still got to go through them in great detail. Even companies like Raubex are moving in there. Barloworld, who sells yellow metal in Mongolia and in Siberia, you know, selling Caterpillar. So that to me is a lot more attractive than the banks and retailers. These companies are just being chucked away for nothing. You know, Pete made such a good point about an owner being aware of every nut and bolt. And I think if you go to the nuts and bolts of these businesses, they’ve just been given away for nothing. What Peter said about sunk costs, you know, if you look at the sunk costs in these businesses… I think there’s rich picking in some of the small caps. We’re all index huggers. We love to hug the index here; Naspers, Prosus, British American Tobacco. But if you build a little portfolio or you build a portfolio at some of these businesses – you’re not going to be disappointed.

David Shapiro on those stocks we should do our homework on:

Well, those are the ones that I mentioned. I think anything that sells a machine that makes a noise or needs big tires and that – those are the kind of companies (I think). It’s not my area. I’m an accountant. I’ve got soft hands. But I think those are the businesses that are going to benefit. Where you’ve got some people who know how to use a shovel or know how to use a jackhammer. I think [those] are the businesses that are going to benefit.

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