ShareHub Hotlist 2019 Review – Week 04

Better headlines from across the pond on China/US trade talks have helped the markets to return to some calm in 2019. That said, it should be noted that as January closes out, tomorrow… the DOW Jones is on target for a near 10% gain. It’s put on 2000pts since the year began and not much media hype to accompany it. In December, when the index fell 2000pts, the media channels were big bears. Many will know by now that the markets and the media are entwined. If the big banks and large hedge funds want negative stories in the press, then that’s what tends to get printed. Nothing new here, it’s been going on for centuries. Stock tips (often poor ones) would be dropped around the floor in places like the coffeehouse back in the 17th/18th century. Today, with multi-media channels galore, it’s just as easy to drop a story out there as it was to drop a piece of paper on the floor. The difference is of course… the audience. A story by Reuters or any news agency hits millions of users/readers. The stories get edited or tweaked and then sold on and recirculated to more millions and so on. The chances of misinformation are higher today than ever before. Why? Because there is no real penalty for poor journalism. Just an apology or subsequent edit required. This isn’t just the press, it involves the market too. Analysts, brokers, banks, hedge funds. All issue notes to the market and these are often acted upon by investors. Take Enquest – the North Sea E&P as an example. RBC Capital issued a broker note recently, dropping their target from 55p to 15p. Now that’s a serious downgrade. The problem is, it was based on some poor research. In fact, it was based on incorrect information. Misinformation by RBC. A day later RBC Capital issued a second note correcting their error…

“We published a note earlier incorrectly saying that there was a risk to the company’s covenants, which we had wrongly identified to be 1.1x RCF/EBITDA,” analyst Victoria McCulloch said in the new second note.

“However, the two upcoming covenant tests (31 March, 30 June) require EnQuest to have a net RCF/ EBITDA of 1.5x or less, using a trailing 12-month EBITDA.”

McCulloch added: “There is no risk of covenant breach under the updated RBC oil price deck.” END.

Covenant breaches are big news and major risk warnings for Investors. It’s as bearish as it gets. Which might explain why RBC dropped ENQ’s target price from 55p to 15p. However, after realising their error and that no covenant breach was likely, the company did not alter their target price. Why not? Probably because it doesn’t suit their position or clients positions aka debt holders, hedge funds and many others. all of which have (or may have) an interest in seeing Enquest’s equity price lowered.

A couple of years ago I highlighted the vast gap between broker notes and reality. In 2016, the commodity market was in a poor area. Kaz Minerals was trading at 90p a share. There was not a broker note around that had a bullish view. In fact, a year later after Kaz minerals had five bagged, jumping to 500p, HSBC promptly downgraded Kaz. The bank’s rating moves to ‘reduce’ from ‘hold’ and the price target drops from 440p to 400p, suggesting a fall of circa 20% from the then current price of 510p.

HSBC Said, “We had assumed copper production at 276,000 tonnes for FY17e, but management guidance is between 225-260kt; our updated forecast is at the top of this range at 254,000 tonnes.” END. Date Feb 2017. Roll on May 2018 and Kaz Minerals has double bagged from 515p to 1030p+. HSBC’s guidance / broker notes barely budged from 450p for the entire year before finally capitulating to their woeful error and setting a target at 760p.

Just where do these banks get these analysts? And why are they paid 6 figure salaries? In a 2 year period, Kaz Minerals had jumped from 90p to 1030p based on nothing more than a recovery in copper prices and stable production. Would it be fair to ask HSBC to disclose all known internal business investments in Kaz Minerals between 2016 and 2018? If they were shown to be buying stock, would that be grounds for fines? This is the problem that investors have. You simply cannot trust the motive behind these notes. Goldman Sachs have also become known within investor forums as saying one thing and then doing the opposite. If they say ‘sell oil’, then that really means ‘buy oil’.

In summary, there’s not alot out there today that can be trusted, certainly in media terms. Misinformation is rife and unfortunately this is just another hurdle that investors have to jump and contend with from time to time. It’s not right and laws should be introduced to ensure that if banks/brokers issue notes, then they cannot trade in the opposite direction… until of course, a new note is issued. The problem is, the manipulation goes further as it reaches other associated funds/investments like etfs and so on. The answer is to be wary of everything you read. Treat broker notes with a keen eye. And yes, when a large bank says sell… that might actually mean buy. Easy isn’t it?

Week 4 Results – TheShareHub picks remain top although the Guardian and Independent picks have done well to close the gap helped by the recent wobble within commodity stocks. It’s a curious one as with PoO, the price is actually up 20% off lows from last month yet some stocks are still trading like PoO was in the low $50’s (Brent). A period of consolidation among some equity stocks is not unusual after a strong start to the year but some of these pullbacks look overdone. Amerisur Resources is a prime example. Exploration success, boosts to reserves and production from CPO-5 all contributed to the share price move from 15p to 20p. However, today the share price is 17p having given back 3p. That looks overdone and a return back to 20p should be expected in the coming weeks especially when the company is set to drill another 4 to 6 high impact wells in 2019. A market that looks forward rather than back would be welcome and a refreshing change from the day trading algo bot drivel that is prevalent today. News events will continue to drive AMER’s share price and assuming they deliver good results, the share price has plenty to catch upon already, nevermind what is waiting around the corner. Elsewhere across TheShareHub top ten picks, PMO delivered a great result from Zama-2. Further appraisal work is required including flow tests and news should be coming on those soon. Unfortunately the market ignored the Zama-2 news and instead prefered to concentrate on PMO’s rumoured bid for Chevron North Sea assets. Another stock suffering of late is Petra Diamonds. A poor update was met with the usual market heavy handed approach. Down from 45p to 33p is a sizable correction and one that dents sentiment. PDL must work hard now to deliver on debt reduction and production growth, both of which should be possible in the quarters ahead.

News today of Ophir’s accepted bid of 55p is disappointing for the sector as a whole. It undervalues Ophir by a country mile. The company sold 20% of its Tanzania block a few years ago for $1.3bln. It still holds 20% which even if it was valued at $500m today leaves the rest of the folio valued at zero. Ophir made many errors in their exploration campaigns and also with the Salamander acquisition. But all said and done, 55p a share is an absolute steal for Medco. So that’s Ophir, Faroe and Ithaca all gone in the last couple of years. Who’s next! Tullow? Premier Oil? Enquest? Amerisur? Whoever it is… lets hope the offer prices are much much higher.

Finally, a quick note on TheShareHub free subscription service. Due to GDPR regs, the subscription service was updated in 2018 and unfortunately has caused some issues. If you were previously subscribed and are no longer receiving updates, please email using the contact page and your details will be updated. All subscribers are required to opt in via a ‘second’ confirmation email so please watch out for this in your spam boxes. As the year progresses TheShareHub intends to send out ‘heads up’ notes to subscribers on a number of stocks of interest. If you would like to receive this service then please sign up using the facility in the sidebar.

Week 4 below, The Independent folio has not been included due to issues over Barack Gold relisting/pricing. The Independent’s picks are up 4% as of week 4. Guardian picks up 3.3% and ShareHub sitting pretty again with 4.68% gain. Long way to go. Roll on Feb.

ShareHub top picks 2019 – week 04
Guardian top picks 2019 – week 04