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My 2018 Winners - Part 1
BY GREG TOLPIGIN - 01/12/2017 | VIEW MORE ARTICLES BY GREG TOLPIGIN

As we enter the final month of the year I thought it would be wise to begin focusing on what my most favoured potential winners for 2018 will be. So each week from today I will highlight the opportunities that I favour most for a stellar year.

Before we start on that path, a few housekeeping issues. I have not been shy in expressing and revealing my negative outlook and outright short positions in the banks and local retailers. I have repeatedly warned against being exposed to anything related to domestic residential housing or domestic discretionary consumer spending. This trade has continued to make money despite US equities trading at record highs (continuously) and the ASX 200 also grinding its way to over 6000. I think this really highlights the major issues that are brewing when even in some of the best equity market conditions the banks and retailers are either making new lows or hovering near recent lows. On the flipside, being long many mid to small caps where a mini-boom is currently underway has been rewarding.

Yesterday’s announcement of a royal commission enquiry into the banks triggered another wave of selling and I will admit I did use this sell off to buy back a lot of my shorts in the banks. After all the findings need to be reported back by February 2019! Markets always initially react to the headline and then begin to reprice according to the details and midway through the day yesterday we saw a large intra-day recovery occur. I continue to be very bearish and will use the opportunity of further short-term gains in December to re-establish bank shorts once more heading into 2018.

Against these shorts I do have a wide portfolio of long positions mostly exposed to “The Green Movement” that I think will continue to perform strongly and some specific energy based company making opportunities that I will highlight in the coming weeks. Essentially my portfolio is long the Small Ordinaries against the ASX 200 and just as guide as some readers may not realize but the Small Ordinaries has gained 13.7% since August (when I returned back to this column after a 6 month holiday) and the ASX 200 just 4.8% due to the underperformance of the banks and retailers. I don’t see this trend changing anytime soon.

So now to my winners for 2018. Unfortunately the first of these is one I have already discussed at length – Lynas Corp (LYC). Now some of you may be bored by the fact that I am repeating myself, however, in my experience, it is this repetition that will reinforce which of my ideas I favour most and in turn this repetition gives confidence in holding these stocks longer and potentially with greater size than if I were to only write it once.

LYC had its AGM this week that also included a 1 for 10 share consolidation. The AGM highlighted some very key points within not only the Company’s own transformation but the broader rare earths market as well.

I have already discussed at length the enormously improving macro conditions that underpin the rare earth and green energy space, but importantly, LYC is now operationally well positioned to take advantage of this. The two slides below show operationally LYC is not only experiencing greater production volumes (with stable operating costs) but this greater production is occurring when prices are improving. This translates into slide two where sales revenue is increasing at a faster rate than production is. Brilliant.

With cashflow improving sharply debt has been paid down to the tune of US$158.5 million, leaving an outstanding balance of US$266.5 million. Demand continues to grow for NdPr magnets for use in EVs where an additional 5000 tonnes of NdPr is required every five years. Into this increasing demand LYC is enhancing its product mix, its throughput as it looks to cement its position as the number 1 supplier of NdPr to the free market.

I was also encouraged by LYC’s drilling program to further increase its resource and reserves to support a further expansion of production. More encouraging though was in the pursuit of securing longer-term contracts the Company has, in principle, signed a deal with Bosch which makes an array of automotive parts for the industry. This deal will provide Bosch with long-term supply and LYC with long-term stable revenue.

As LYC stated at the AGM they expect to make further announcements relating to more long-term contract in the coming months. With this the share price has been steadily improving and is poised to accelerate higher through the $2.20 (post consolidation) level. This will end the current two month consolidation and trigger a nice breakout on the RSI indicator as well shown below.

The more important technical factor is the weekly chart where this short-term break through $2.20 on the daily chart will trigger a bigger larger scale breakout on the weekly timeframes that stretch back to 2014 below. This is where a bigger surge could be in the making all the way to $3.00.

 



View More Articles By Greg Tolpigin

Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.

After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.

Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.



 

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