Director‟s Cut --Money in off-the-ball action .:Macquarie Research

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Director‟s Cut
Money in off-the-ball action
When everyone is looking at the central attraction, it often pays to look at what
has been ignored.
An interesting fact is that the dual-listed spread trades for BHP and RIO have
once again blown out toward their mid-20% highs, and whilst in the case of BHP
a portion of this may be accounted for by the value of the franking credits
(estimated to be 8 – 10%), it would seem the sudden reversal of this spread from
converging could have more to do with the high-profile IPO of Glencore. The
theory goes that with Glencore likely to enter the FTSE 100 from its day of
listing, investors will have used BHP Plc and RIO Plc as funding vehicles – the
result being a temporary widening of the spread between the UK and Aussie
listings. With investors having paid the application monies and due to receive the
stock on 24 May, the selling pressure should come off the dual UK listings. With
buyback programmes in place that look set to last another 4–5 months, we
would expect mean reversion of the spread. >> Read Last Quarterly Update
With LinkedIn, there is the risk of a rising tide lifting all boats resulting in some
overvaluations. Following the 173% surge in LinkedIn on Day 1, there is
renewed talk of an internet bubble. As today‟s Lex column reminds us, Renren
rose 29% on its first day, but is now trading below the US$14 offer price. In
other words, it pays not to get caught up in the hype of these high profile IPOs.
Looking at internet stocks more generally, there are many stocks with very high
valuations. The Chinese imitator of YouTube is a prime example. Youku.com
(YOKU US) is on a forecast P/E of over 220 times earnings, and that‟s for 2013.
Our Hong Kong based internet analyst Jiong Shao sees downside to both this
stock and Alibaba.com (1688 HK) as investors become overly optimistic.
That said, not all internet stocks have such stratospherically high P/E multiples.
Google (GOOG US) for example, is on a forecast P/E of 12.8 times earnings for
2013. So if you are looking for internet exposure, investing in the established and
highly profitable business model of Google looks like an attractive proposition.
Keep in mind, Google is ranked as the world‟s second most valuable brand,
ahead of the likes of Coca-Cola and McDonald‟s, and this „mind share‟ should
underpin its long term success.
Macquarie Marquee Ideas
With Jim Lennon and the commodities team upgrading their forecasts for iron
ore and met coal, and Bonnie Liu’s bullish call on copper, it is no surprise to
see commodity stocks in the Macquarie Marquee Ideas.
In Australia, Matt Nacard highlights Rio Tinto (RIO AU) and Atlas Iron (AGO
AU) as buys, as both offer good leverage to high iron ore prices. Boral (BLD
AU) is the sell idea, due to growing domestic headwinds. >> Read Report
Tim Smart has added Jiangxi Copper (358 HK) to Asia‟s Marquee buy list, as
the stock has a 90% correlation with copper, and Bonnie Liu has lifted her 2012
price forecast to US$5.25 per pound. China Unicom (762 HK) is Asia‟s sell
idea, on the view earnings will continue to disappoint.