Despite the recent rally, there’s one sector of the Aussie market that remains severely beaten down.
It was once the heart of the Aussie market.
In fact, when the world looked at the Aussie market it used to see it as this sector and nothing else.
For the moment that has changed. Foreign investors now look in awe at something else. They look at the big dividend yields of the four major banks and other dividend paying stocks.
But when investors look back 10 or 15 years from now, they’ll see this as a short-term shift before the Aussie market returns to normal. That means turning back to one sector in particular. A sector that could be on the verge of a new multi-year boom…
Last week we popped along to the State Library of Victoria to listen to resource guru Rick Rule.
Rick is a must-see guy when it comes to resource stock investing. He was in town for the Mines & Money conference. But he agreed to speak to a group of Port Phillip Publishing subscribers first.
It’s always handy to get someone else’s take on a particular sector. For most of the past year we’ve focused on dividend paying stocks. That was because there were so many undervalued opportunities.
But now that everyone has the same idea it’s harder to find value. So while we’ll keep looking for income opportunities (that’s a must with record low interest rates), we’ll focus more of our attention on the best growth stocks the Aussie market has to offer.
And right now, that means looking at the resource sector…
Rick told a few stories that helped remind everyone at the presentation about the art of contrarian investing.
Most people think that contrarian investing means investing in the opposite way to everyone else. But that’s not how contrarian investing works.
Contrarian investing is about identifying trends and turning points in the market. It’s about spotting the moment that the market has become irrationally exuberant so you can sell.
It’s about spotting the moment when the market has become so gloom-ridden and bearish that you can find the sectors and specific companies that are set to rebound.
But that’s not all. As we say, it’s also about finding new trends. The ability to do this is one of the key requirements to be a successful small-cap investor. Small-cap stocks are a breeding ground for new trends and new ideas.
It’s something we look for every month in Australian Small-Cap Investigator. We look for innovation. We look for disruptive companies…firms that are set to ‘tear up the rule book’ of a specific industry.
For instance, last month we picked up on a tiny Aussie stock that could be the ‘Aussie Google’ when it comes to the advertising sector.
But when you think of new trends and innovation we’ll bet the sector you think of least is the resource sector. And yet, when it comes to innovation, without the resource sector most of the technology you see around you today wouldn’t exist…
Perhaps the best example of this is rare earths. Rare earths were a hot sector from 2006 to 2010. Stocks in this sector saw two booms, on either side of the 2008 crash.
The rare earths story is half resource story and half tech story. This collection of virtually unheard of natural elements is vital to today’s technology.
Without them technologies such as flat screen TV’s, mobile phones, and satellite systems may not exist. These elements that make up a tiny part of the overall end product help put the ‘smarts’ into these devices. And yet few have heard of them.
But that’s not the end of it. New technology begets new technology. It helps improve manufacturing processes and create new products.
It can make even the most boring commodity technologically advanced. It’s how a commodity lying around your home that’s ‘soft’ enough to crush or tear with your bare hands can be become as strong as steel.
This partly explains why we’re backing the resource sector again. Rick Rule’s presentation helped reinforce our thoughts. The time to buy into a sector is when few others are interested. Right now, stock prices are proof that few care about resource stocks – for now.
But the fact remains that resources are a vital part of the Aussie and global economy. The demand for iron ore, copper, coal, and oil isn’t about to dry up. These resources will always be in demand.
The same goes for the new process that can turn a ‘lightweight’ commodity into something that’s as strong as steel.
This new boom may not begin tomorrow or even next month. But as Rick Rule said, the best time to buy resource stocks is when no one else is interested. That’s certainly the case right now, but as we see it, that attitude won’t last for long.
Cheers,
Kris+
From the Port Phillip Publishing Library
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