Stockbroker Morgans took a more company-specific angle in its commodity forecasts update at the beginning of October. While pointing out the economic cycle remains supportive for commodities demand in general, the December quarter is nevertheless seen as possibly triggering a "breather" for the sector.
Equally important is that producers in Australia and elsewhere in recent years have concentrated all their efforts on bringing down operational costs, which means operations are lean and mean and margins are high, with cash flow abundant, but this is where the trend approaches its natural conclusion. To put it in Morgans lingo: the sector has reached peak cost-out.
In this environment, argues the stockbroker, genuine value is harder to find. In terms of stock picks, Morgans suggests investors look for two key elements:
1/- whether a company is already holding value-accretive growth,
2/- or whether higher prices are not as yet priced in.
Morgans suggests Oil Search (OSH), OZ Minerals (OZL), BHP and Rio Tinto all satisfy these criteria.
The broker also likes Senex Energy (SXY).
OSH Price at posting:
$7.17 Sentiment: Buy Disclosure: Held
