This post formed the basis of an article that appeared in the May 2017 edition of the ASX Investor Update on 9 May 2016. Michael Gable is a regular expert contributor to the ASX. You can access the ASX version of the article HERE.
For a number of years now, investors have known of Australia’s growing reputation as the “future food bowl of Asia”. We have a history of digging stuff out of the ground and selling it overseas. But it can be argued that growing stuff out of the ground and selling it overseas has more potential for the future. When looking at companies to invest in on the Australian market, there are plenty of resource and mining companies to choose from. However the choice of agricultural companies is more limited. If investors wish to tap into this theme of being the food bowl of Asia, then they need to tread carefully. In the last year, we have seen some companies face hurdles in trying to sell their wares into China. Stocks like Blackmores and Bellamys have seen large drops in their share prices and investors are reminded that selling any commodity, hard or soft, can be fraught with risk and volatility. Aside from the opportunities of selling into Asia, the Australian food market has also changed over time. Australian consumers are now becoming more discerning when it comes to produce, as well as being more health conscious. In this article, we will look at the charts of four different stocks in that sector. We have chosen companies which are different to each other to aid investors looking for a little diversification. They are Graincorp (GNC), Costa Group (CGC), The a2 Milk Company (A2M), and Treasury Wine Estates (TWE).
Graincorp is a $2bn grains company, focusing on storage and logistics, marketing, and processing. Most investors would be familiar with Graincorp as it was on course to be taken over 5 years ago until the government blocked the sale. That disappointment naturally led to a drop in the share price a few years ago and it hasn’t made much headway since then. Earnings for Graincorp used to be very cyclical but now they have invested in other areas such as malt and oils. However, there is still a large cyclical component, and record summer and winter crop production forecasts already seem baked into the share price. Having said that, when we look at the chart we can still see some potential for further upside. Early last year we saw Graincorp retest the 2014 low and bounce off it strongly. The stock is now making some higher highs and higher lows and that is crucial if it is to establish a new uptrend. Looking at the channel that it is now trading in, we can see potential for weakness back towards $8.50. If so, that would provide a better entry point. After that, we expect Graincorp to head higher. The first major level of resistance that investors need to be aware of is near $10.
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Costa Group is the new kid on the block, having listed only two years ago. In that time though, we have seen its market capitalisation more than double to nearly $1.5bn. Costa Group is involved in produce, logistics, as well as farming. Their recent results in February beat guidance with earnings driven by an increased berry volumes and higher pricing for tomatoes. The question for investors is whether the growth rates, which are priced in, are achievable. The other cloud over the company is the Chinese joint venture. It is going well at the moment but we have seen expansion into China to be a double edged sword for companies as they try to find their feet and get established. The chart for Costa Group shows a stock which is trending higher. The trend is your friend as they say so investors may see further upside. Momentum indicators such as the Relative Strength Index show the stock to be overbought, but stocks in a strong uptrend can exhibit this behaviour for quite a while. As the share price accelerates here and becomes vertical, we could see even more upside. However investors should be wary of the sustainability of these vertical moves and be prepared for a healthy consolidation.
The a2 Milk Company
The a2 Milk Company is known to many Australians as a producer of milk and related dairy products which contain a strain of protein known as A2 instead of a combination of A1 and A2. Their primary markets are Australia, New Zealand, and the UK, but with increasing infant formula sales to China. It is this latter strategy which makes some investors nervous in the wake of missteps made by Bellamys in the same marketplace. However until now, the a2 Milk Company seems to have navigated its penetration of the Chinese market quite successfully and their most recent results in February were above expectations. The a2 Milk Company has only been listed for two years and has often proven to be a tough chart to read. It tends to have sharp moves up and down and it can be difficult to know if any drops in the share price will be followed through with more selling. Despite the messy chart, for the moment though, we can safely say that the stock is trending higher and investors in the a2 Milk Company would have no reason yet to sell. If the stock does wish to take a breather, then we would be looking for it to find support in the mid $2’s. If that were to occur, then we would be presented with a low risk buying opportunity – all else being equal.
Treasury Wine Estates
Treasury Wine Estates holds a portfolio of well known Australian brands such as Penfolds, Lindemans, Wolf Blass, and Rosemount Estate. They sell to more than 70 countries around the world, including the US and China. The share price failed to go anywhere a few years ago when we were in the midst of a wine glut but improving conditions has seen the share price head from $4 a few years ago to over $12 now. Their half yearly results in February were very good and the share price jumped even higher. The average analyst target shows the stock to be fully priced but the range of price targets start at $10.45 and extend to $14. It all comes down to estimating future growth, and that can be very difficult. The chart however shows a stock which the market is still happy to buy into. The stock has been trending nicely over the last couple of years. What I look for in a trend is if the moves up are quick and on high volume, and any pullbacks are shallower and on lower volume. If we see these signs, then it means that the trend is strong and sustainable. This is what we are seeing here with Treasury Wine Estates. The chart shows that the market is happy with the stock at these levels and is happy to buy in on any dips. The trend for the moment seems more sustainable than the other stocks mentioned here. We would therefore be happy holding a stock that displays these characteristics.
Michael Gable is managing director of Fairmont Equities.
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