I have three big questions for you
Tom Bulford Sep 11, 2012
For investors this is a crucial time of year. August is the month for holidays and other entertaining distractions. But now the great engine of finance and industry is cranking up again. The interim results season is upon us, and investors are back at their desks eager for news from the front line.
In today’s Penny Sleuth I want to talk about the big questions that any investor should be asking themselves this month. And how they’ll help us find the few great companies that will thrive – no matter what turmoil we see in the coming months. First up...
1) Should we fear the slowdown?
Ever since the banking crisis cast its shadow over the world economy, business leaders have seen fit to be cautious. No forecast for the future is complete without a backside covering reference to the fragility of the global economy. These health warnings are as prevalent as ever, but now we are seeing some real signs that growth is slowing.
The chief executive of one UK manufacturing business to whom I spoke last week described it as “death by a thousand cuts”. Those of us old enough to remember previous recessions will recall fateful headlines as large employers closed down overnight, instantly condemning hundreds to the dole queues.
Perhaps because the UK has few large manufacturers these days, and those that do exist are highly automated, we have not seen this phenomenon this time around. But manufacturing is beginning to feel the pinch. Orders are, at best, being pushed back into next year or else cancelled altogether. According to John Kembery, chairman of handheld computer maker Belgravium Technologies (AIM: BVM), “as conditions worsened in international financial markets during the first half, hesitancy to place orders returned, with customers once again becoming reluctant to commit funds to new or upgraded projects”.
Michael Collins, chairman of Concurrent Technologies (AIM: CNC), says that “conditions in sectors other than defence are not currently improving as much as we expected earlier in 2012”. And Stephen Phipson, chief executive of STADIUM GROUP (AIM: SDM), which has suffered from a decline in its electronics manufacturing services business, says that “unlike 2009 when demand, and the visibility of future demand, evaporated almost overnight as de-stocking occurred, the last nine months have seen a slow, steady decline in demand as customers slowly lose confidence in the economic recovery and restrict their supply chain in anticipation of a downturn in their end markets”.
So while it remains tough out there, I don’t see a return to the kind of disaster we witnessed in 2009. If the economy continues to weaken, you’ll have to be very selective about what shares you buy. But in my experience there will always be a few companies that thrive no matter the state of the economy. And that’s especially true if there is an industry that is enjoying a major breakthrough – more on that in a minute.
Let’s move on to our next big question….
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2) Could metal prices stage a comeback?
Fears for the future of Chinese demand are mounting. According to Anglesey Mining (AIM: AYM), which has a 26% stake in Canadian miner Labrador Iron Mines (TSX: LIM), the spot price of iron ore has dropped more than 20% in the past four weeks.
Some analysts see this as a buying opportunity. According to JP Morgan analyst Alessandro Abate, iron ore is poised for a turnaround as destocking comes to an end and Chinese buyers switch from expensive domestic suppliers to cheaper sea-borne imports. Andy Xie, though, former Asia-Pacific economist for Morgan Stanley, sees things differently. He expects the iron price to sink further and stay low. He expects demand to slow significantly as construction of highways, railways and properties passes its peak. “This story will come to a crashing end” is his gloomy prognostication.
For other metals, however, the picture is mixed. The price of ‘King Copper’ for instance is higher than it was three months ago. But sentiment is at best nervous. Big miners are cutting back on investment plans and if they are not prepared to commit money to new projects it will certainly be difficult for mining juniors to get the finance they need.
I’ll keep you up to date on what I think could be the best mining plays in the coming months. But what I really want to talk about today are the types of companies that will really thrive in the year ahead – the innovators.
3) What’s the next big thing?
In a tough economic climate producers cannot expect their customers to simply order more of the same. Innovation is key.
New products can give companies an edge over their competitors or induce demand for things that never previously existed. I am always on the lookout for something new.
Microsaic (AIM: MSYS), for example, looks promising. It has developed a miniaturised mass spectrometer for the identification of substances in solids, liquids and gases. Lo-Q (LOQ) has signed a partnership with Australia’s Sanderson Group to take its novel queue-busting systems to Asian theme parks. And Abcam (London: ABC) has built a hugely successful business supplying protein research tools goes from strength to strength.
Chief executive Jonathan Milner is optimistic and investors should heed his words. “We expect Western markets to remain uncertain as governments address fiscal deficits but, looking ahead, in this golden age of biology and discovery, the demand for high quality, discovery research tools can only increase, creating an abundance of opportunities”.
I couldn’t agree more. As far as I’m concerned, there is one really big and new story this year – biotechnology.
I believe we are living through a new age of biological discovery. That’s why I started the Red Hot Biotech Alert. And I have no shortage of remarkable breakthroughs to write about every week – from regenerative medicine to the genetic revolution in cancer treatment.
Already this year, the Nasdaq Biotech Index is up 34%. And I expect that to continue. After years of promising so much, biotechnology has finally arrived.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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