BROKERS’ NOTES: Buy Tencent, sell thermal coal miners
Anchor Capital’s Seleho Tsatsi on what the smart money is doing
Seleho Tsatsi, resource analyst at Anchor Capital
Tencent is a business that generates a very strong return on capital and high profit margins. Recently, the company has re-accelerated its cash flow. Despite this, Tencent has been trading flat since the beginning of the year. It has a market cap of about $400bn, of which $100bn sits in its investment portfolio. If you strip this investment portfolio out, the stock is valued at 11-12 times forward earnings. This low valuation is still a consequence of the Chinese government’s regulatory action against big tech in the country. We acknowledge this risk, but the stock is the most attractively valued in a long time.
SELL: Thermal coal miners
The thermal coal price has plummeted by about 45% this year and is trading at $114/t. This decline hasn’t been reflected in the price of companies mining the fuel. That is because some investors may expect quite a cold winter in the northern hemisphere. As it stands now, the miners’ share prices don’t reflect the underlying coal price.
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