The dispersion between expensive and cheap stocks is extreme.Melbourne-based fund manager L1 Capital favours mining stocks over industrials to navigate a precarious period ahead for equity investors and says the unloved energy sector is a screaming buy.
“We believe we’re hitting an inflection point in terms of earnings for resources, and combined with a very undervalued sector that it’s much more attractive to play resources versus industrials,” he said.The industrial sector, he warned, would be weighed down by slower earnings growth, higher interest rates and cost of living pressures while input costs such as wages, insurance, electricity and utilities were increasing.
“Investors today are just as bearish as they were in the early to mid-part of 2020. If you think back to that period, COVID fears were extreme, virtually no one in the world was driving or flying, storage globally was full, and the oil price was actually negative.“We find it very hard to understand how investors can be just as bearish today as they were back then,” he said.
Mr Landau said that was motivated by the fact that the LNG assets of Santos were “underappreciated” and a structural separation would deliver a 40 per cent valuation uplift.The fund is long stocks with price to earnings ratios of about 10 times, 6 per cent free cash flow yields and low net debts. It is short 19 times earnings stocks with cash flows that are 40 per cent less cashflows than longs.