General | Feb 03 2006
Regular users of the FN Arena Market Sentiment Indicator will no doubt have already noticed the world’s largest mining company BHP Billiton (BHP) has disappeared from the select list of most highly recommended stocks in the Australian share market.
However, looking at the company’s reading via the accompanying Stock Analysis service still shows a reading of 0.7. This should still guarantee a ranking at the top of the market, so why has the stock disappeared from the list?
The answer lies in the company’s share price. While investors don’t seem to get enough of BHP these days, pushing the share price above $29 a share on Monday, the company’s average target price hasn’t followed suit. For all we know, there have been no changes to experts’ target prices since March 30, when Macquarie put a prospective $29.09 on the stock.
Macquarie’s move has taken the average target price in our overview to $27.25. While nobody is suggesting (not with any certainty) that the twelve month outlook for BHP shares are negative from last week onwards, it remains a fact of life that experts in the market seem unable to yet quantify what the true upside is of ongoing high commodity prices.
The fact that most of them (seven out of ten) have kept their recommendation on Buy may give investors some indication, though.
Alas, with a projected negative return (on the basis of current data) FN Arena’s Market Sentiment Indicator can no longer list the stock among its most highly recommended stocks.
A similar thing happened to WorleyParsons (WOR) at the beginning of last month. After its shares surpassed even the most bullish twelve month price targets set by Smith Barney Citigroup and UBS a few recommendation downgrades followed, lowering the stock’s reading on the Market Sentiment Indicator. By then, WorleyParsons had already disappeared from our list of most highly recommended stocks, for the same reason as BHP has disappeared from it.
We are not necessarily drawing the conclusion that recommendation downgrades now lay ahead for BHP Billiton. But Merrill Lynch’s resources guru Vicky Binns did make a big call on Friday, stating the shares had been inflated too much, in line with spot prices of major metals.
Vicky thought it was only logical to expect share prices of resources companies, including BHP, to be ripe for a retreat over the next six weeks or so, possibly taking BHP’s share price back to the $22-region. That’s seven whole dollars (more than 24%) below what people have to pay for them in today’s market.
In addition to Vicky’s bearish short term call, the experts at medium sized stockbroker Tollhurst Noall sent out a note to clients on Monday, warning them of the perceived dangers of buying into BHP shares at current prices.
Tollhurst Noal reminds its clientele BHP shares have already gained more than 15% in March. The company’s release on Friday of the details of its share buyback imply BHP is about to return $2.25bn in cash to shareholders later this month.
The obvious comment is, Tollhurst advocates, that investors should buy BHP “before the money arrives”. But what will happen after the event?
Tollhurst Noal thinks buying BHP shares for the buyback proceeds arriving has now become “a pretty weak trade”, for the simple reason that it would seem like everyone’s already done it.
