what the smart money is doing
BROKERS’ NOTES: Buy Master Drilling, sell Tesla
Andrew Joannou, portfolio manager at Ninety One on what to buy and sell
Buy - Master Drilling
It’s good to frame it in the context of a world that is very inflationary, with the major central banks being forced to increase interest rates. At the same time you have the Russian invasion, which is making the inflation problem worse and helping commodity prices stay up. This is a good environment for resource companies. They are very profitable now and have flush balance sheets. Many of these businesses also haven’t been spending as much money as they should on their mines over the past decade. They are only now starting to invest at the correct level, with many adding some catch-up capex as well. This is good news for the businesses that supply these mines. My favourite in this sector of mining service companies is Master Drilling. It drills shafts and tunnels for the mines and for the first time in almost seven years it is running at close to full capacity. It also has some pretty fancy innovative technology and has continually invested in its fleet. It’s trading on a p:e of less than 8 and a price to book of less than 1, and at this price, the share is not discounting any good news. I think this is incorrect and that it’s just the start of a positive mining capex cycle, and Master Drilling will benefit from that.
Sell - Tesla
I’d be wary of highly rated growth businesses that rely on very low discount rates. As interest rates go up you’ll see investors lose their appetite — you’ve already seen it in the tech space, and Tesla is the poster child for highly rated shares. But I think Tesla has other issues over and above rising interest rates: as regular car companies start to produce electric vehicles there’s going to be much more competition. Once they all start making decent electric vehicles, maintaining a 25% market share will be very difficult and that’s sort of embedded in Tesla’s current market price.
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