Looking for outperformance #1 - Antofagasta

Whatever you hear in those adverts, investing and trading financial markets is not easy - it is a series of trade-offs.

The trade-off between risk and reward, being long or short, and perhaps the most important of all...

The trade-off between having positions open and the opportunity costs you incur by being invested.

It's impossible to trade everything.

Unless you have an infinite amount of money you will always face those opportunity costs by being in the market, those returns you forgo by being in some positions and not others.

They are unavoidable.

We have to reconcile ourselves to them or not trade at all and be happy with the optionality provided by holding cash.

But that utility is cold comfort in a market that’s moving and where other traders are making decent gains.

If we are going to participate and accept that we face this opportunity cost trade-off, one thing we can do is to look for trade ideas and stocks that have the potential to outperform.

Outperformance erodes opportunity cost, and if you outperform enough, eliminates it completely.

Although if you do strike gold you will probably end up asking yourself why didn’t  I buy more on the way up etc etc.

Traders are like Prince’s mother... “never satisfied” 

How can we look for stocks and ideas that have the potential to outperform their peer groups?

Well, one way is to look at the relative performance of sectors.

The below chart courtesy of Morgan Stanley shows how UK sector performance has diverged from the collective 12-month average.

For this purpose quants at MS have calculated the degree of standard deviation for each sector but the chart could just as easily show us percentage gains and losses.

We can clearly see that Mining stocks and Diversified Financials have outperformed whilst Pharma and Utilities have underperformed their peers.

That highlights two potential opportunities for outperformance...

Firstly from a continuation of the momentum in Mining stocks and secondly for a re-rating of the Pharma stocks.

Of the two its probably easier to make the case for the continuation of the miner’s outperformance.

After all the talk is of a commodities supercycle, exactly as we saw in the early 2000s prior to the GFC.

The chart below tracks US GDP’s annual rate of growth and plots that against the CRB Commodity Index (a measure of the price performance of a basket of widely used commodities).

Commodity prices continued to rise even as US growth slowed sharply in 2008.

US growth is rebounding once again and so are commodity prices, also boosted by a weak US dollar.

Let's accept that this commodity bull market will continue and decide how we might play that.

The table below is drawn from the point and figure model that I follow to track and categorise price action and trends.

Ticker

Name

P&F

Breakout

Stop

Close

1 Day

1 Week

YTD

Strength

GLEN

Glencore

Bull

Nov 5, 2020

230

304.55

1.50%

7.90%

30.70%

21

KAZ

KAZ Minerals Plc

Bull

Oct 28, 2020

750

858

0.50%

4.80%

30.00%

21

ANTO

Antofagasta PLC

Bull

Feb 15, 2021

1380

1869.5

1.70%

17.50%

29.80%

21

BHP

BHP Group

Bull

Jan 5, 2021

1980

2285.5

0.40%

2.60%

18.70%

21

AAL

Anglo American PLC

Bull

Feb 16, 2021

2300

2807

-2.20%

0.50%

15.80%

17

RIO

Rio Tinto PLC

Bull

Nov 6, 2020

5500

6320

-0.50%

2.20%

15.50%

9

HOC

Hochschild Mining PLC

Bear

Feb 19, 2021

240

213.2

0.20%

-5.30%

2.60%

-11

POLY

Polymetal International

Bear

Jan 19, 2021

1660

1541.5

0.20%

-5.70%

-8.50%

-21

CEY

Centamin Plc

Bear

Jan 15, 2021

116

109.1

0.00%

-3.80%

-11.80%

-21

FRES

Fresnillo

Bear

Jan 15, 2021

1080

989.8

0.60%

-3.30%

-12.40%

-9

POG

Petropavlovsk

Bull

Dec 1, 2020

25

27.1

0.40%

-2.70%

-16.60%

-1

If we look at the table we can see that it is ranked in order of YTD % change, highest to lowest.

Next to the YTD column, we have the trend strength column.

The top 4 entries in the table are all in a bull trend (see column 3) and each of them has the strongest trend strength score available: a bull trend of +21.

So which of these stocks might we buy?

Personally, I discount KAZ Minerals because of governance and ownership issues.

Glencore is a diversified play in the sector - however it has already exceeded the model’s price objective since it broke to bull in late November.

I am drawn to Antofagasta (say it three times fast) which broke to bull on Feb 15th.

The model has a  price objective of £29.00, almost 50% above the current level.

Antofagasta is essentially a play on copper prices as we can see below the two are closely correlated, which to my mind means that it’s an easier story to understand and monitor.

This is so important when you are trying to identify stocks that have the potential for (continued) outperformance.

Something that we will look further into via a short series of articles over the next week or two.