6 bold predictions for 2022
February 3, 2022
Predictions for 2022
In our Investor Webinar from 15 December 2021 we talk about a number of things, including:
– Shorting ASX stocks
– Marc & Stuart’s Crystal Ball: Predictions for 2022
– One of our favourite Uranium plays: Paladin Energy (ASX:PDN)
See full transcription below!
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Mark: Good morning. It’s Wednesday, 15th of December. We’re almost getting ready for Christmas. We’ve got a week and a half more to work I think, Stu. But I’m looking forward to a nice break because it’s been a very hectic year.
Mark: So, yeah. So what we’ll do today is we’ll have a quick look at what we think 2022 has in store for investors. We’ll look at uranium, which we think is on the verge of making a big move. And we’ll look at some shorts, Stu, on the ASX. Let’s kick off with that one.
Stuart: Right. So every now and then I like to go and look at companies that have been shorted on ASX. What’s a short? So Mark, have you gotten the presentation there? Wonderful. Yeah, shorts are where you sell stock first with the intention of buying back the stock later on, which is the reverse of the way most investors do it. You borrow the stock from somebody else, sell it, then buy it back later. Short positions are obliged to be reported daily. So you can download the latest report showing what percentage of the share register of ASX-listed companies are currently sold short at the moment. It’s generally something that institutional investors do. Retail investors can take a different approach. They can buy Contracts for Difference or they can use options. But in principle, it’s the same. You’re betting on a stock going down rather than going up. The reason I like to look at the list of live short positions is because sometimes if the company comes in with some good news, those short positions have to reverse in a hurry. So you get a violent reaction to the upside occasionally if the market’s got it wrong in terms of shorting it too much.
So let’s take a look at what stocks are being shorted right now. Well, a seriously shorted stock is Flight Centre. No surprises there. Investors are betting that it will be a bumpy ride to get back to the kind of business that Flight Centre had prior to the pandemic. So it’s about 14% shorted. Right after that is Kogan at 12%. Mesoblast 9% shorted, we’ll talk about that one in a second. Appen 8%, BHP 8%. So, there’s some stocks that a lot of investors are betting on going down rather than up right now. And a few of them, we take the opposite view. So here’s our prediction for 2022 on four shorted stocks, stocks that are being shorted very heavily. The first one with Flight Centre, we’re taking the view that people will be travelling again in large numbers as of about now. Forget about Omicron or whatever the latest scare is on strains. Omicron is turning out to be a nothing strain of the virus, so it’s unlikely to stand in the way of people, like, getting back into the year or otherwise travelling, booking hotels, etc. We’ve looked at the numbers on Flight Centre and the consensus for not the current financial year but the one after that is for a very strong rebound in business. So we’re thinking that the shorts will come off that stock.
Kogan. Kogan grew extraordinarily quickly through the early stages of the pandemic. It then had to get its supply chain issues sorted out in order to be able to cope with that level of growth. It’s now doing that. It’s investing in its own delivery infrastructure, for example, so it doesn’t have to rely on Australia Post. Once again, the numbers are compelling. So we think once it’s clear that the supply chains are in the process of being shorted, that stock can rebound. Appen. Macquarie Bank ran a masterful scare broking campaign a couple of weeks ago, suggesting that possibly business in 2021 calendar wasn’t as good as people were expecting. Well, we’re now 10 days out for Christmas and we haven’t heard from Appen. So, unless the company systems have gotten worse, there is the potential for 2021 to actually be as good as the company was saying it was going to be, in which case, Appen is headed up. The final one is AMA Group. It stands to reason that more people on the roads means more smash repairs. I think you’re gonna see some pretty strong results for AMA Group beginning with the half-year that’s coming up. So once the good news starts to pile up on these stocks, you’ll see the short positions retreat, and that could lead to some pretty significant upward share price moves is our argument.
Mark: Yeah. And no surprise then that three of those stocks are on our topics list, right? So, Appen, AMA, and Flight Centre.
Stuart: Right. And now, Mark, it’s time for us as the year comes to an end to play Nostradamus and share some predictions for 2022. So what are we seeing in our crystal ball?
Mark: Yeah, so the year’s coming to an end. We gave some good hard thought to what’s coming down the pipe. And so, yeah, Mark and Stuart’s crystal ball, what to expect next year. There’s a bunch of things actually. And there’s actually a theme running through them as well, through some of these predictions really. So the first one, and I think this is really the most important one because it affects everything, is inflation. We expect that to go through the roof. As a result of that, gold, we’ll see that go up well above $2,000 U.S. an ounce. You alluded to it already about the vaccines. We think the vaccines are pretty, pretty solid, and will provide protection against new strains, and, you know, we’ll talk about the effects of that for short stocks. But on the back of Afterpay, we think there’s more Aussie tech stocks that can be taken over in the next year. Labor to win the federal election the coming year, and what that will do for the childcare sector in particular. And lastly, we have a separate presentation on that uranium and where that’s headed.
So let’s kick off with inflation. It’s not just anecdotal evidence, right? It’s the actual numbers in the past couple of weeks have shown that inflation is through the roof. Just look at that article in “The Guardian” about U.S. inflation. UK is similar. I think it’s a 30-year high in UK. And it’s affecting all sectors of the economy. It’s labor, its materials for construction, it’s cars, as we all know, that’s been going on for a little while longer. And again, it’s across the board. So, well, we expect interest rates will go up faster than expected. So there’s already talk obviously of tapering next year and few earlier-than-expected interest rate hikes in the U.S. Initially, you’ll see improvements in bank interest margins, but if these hikes and these interest rates increases are too sudden, obviously that will impact sort of the real economy, and that could actually be bad for banks, you know, with companies going bankrupt as an example. So the on-balance effect on banks is still to be determined and we need to see how that plays out. But what usually is a good bet in increasing interest rate environments is defensive stocks like utilities. So have a look at some of those stocks on the ASX. We think they can do pretty well in 2022.
Then gold. Well, we’ve talked a lot about gold, Stuart, over the last couple of months. We think it’s headed up. And as you can see the chart, it’s been trending sideways for the last 15 months. And part of that some people say is potentially related to Bitcoin, which may have replaced gold to some extent as a store of value in uncertain times. But also I think the markets are uncertain what to expect from the Fed in terms of rate hikes, because if that grows really quickly, and they want to keep a runaway inflation in check, you could see really fast rate increases, which will indeed bring inflation under control, and that, in turn, wouldn’t be that good for gold. So there’s uncertainty in the market there. So yeah, we see it moving up, gold. Buy stocks like NST, which is on our topics list, Newcrest, but also Evolution’s too. Any thoughts from your end on the gold play?
Stuart: Yeah. So basically look for anyone with a decent cost of production, because times are gonna be good. We’re not seeing gold fall in a heap, like go back to the levels you see at the left-hand side of that chart. It’s beginning to form a range between about $1750 and $1850. And the sense of it is that possibly the Fed will chicken about tapering off too quickly. And at that point, gold has got to do well. The other thing is, you’ve seen Bitcoin and the other cryptocurrency has been dropping heavily lately. So possibly that boom has played itself out. But I’m not hearing a lot of millennials talking about buying gold at the moment. So this is a great opportunity to position oneself in the world’s original crypto, tried and trusted since 10,000 BC.
Mark: All right. Then looking at the vaccine. So we’ve got the Omicron variant. And, Stuart, as you mentioned earlier, it seems like it’s a mild version and it’s displacing Delta which is good. And it’s… So Omicron has sort of milder side effects. So what we think will happen is that the vaccines that we have and the developments that are still going on that will come out in 2022 will keep new strains in check. While we may see infections rise, and actually, it’s happening in New South Wales already, we don’t see deaths and hospitalizations going up because that’s really the metric that you need to look at, not the number of infections in our view.
Stuart: President Cyril Ramaphosa in South Africa just got COVID, and on his account, he can barely feel a thing. So that tells you that Omicron is a nothing virus.
Mark: Yeah. And look, in the end, we’ll all get it at some point, and so you can’t let that dictate the rest of your life, right?
Mark: So based on this, we expect travel stocks will rebound hard. And we spoke about Flight Centre, but there’s other stocks as well. Well, actually, AMA is not a travel stock, but it’s one of…[crosstalk 00:09:55.054]
Stuart: It’s a travel stock in the sense that we will be using our cars a heck of a lot more.
Mark: Yeah, road trips maybe, yeah. But also Webjet, Helloworld. So there’s a bunch of stocks out there that have come off recently because there was an initial spike and markets opening up for travel again, and then, you know, there was this Omicron thing. So we expect it won’t be all that bad actually going forward. But then another one, and I think this is really interesting to look at. Following the Afterpay deal being acquired by Square, and that was approved earlier this week, we think there’s more stocks that could actually be acquired, because valuations for most of them, not all of them, are actually quite reasonable given their growth rates. And also what’s interesting is the type of tech listed on the ASX is slightly different from what you find elsewhere around the world. So buy now, pay later is a good example of something that was basically homegrown in Australia and then rolled out to the rest of the world. But also AI training with Appen for instance, PCB design with Altium, that’s not something that you find in a lot of other markets in the world. So there’s some specific elements to the ASX in that respect.
And then looking at, you know, stocks that we think are potential takeover candidates, and we say potential here. Appen because of its specific technology, ZIP and Sezzle because they both have strong U.S. exposure. And if you’re a big financial player, you don’t have any buy now, pay later technology, these could be the two candidates that you look at to buy some of that technology. But Altium, obviously one of them. WiseTech is pretty expensive, but it’s got a really nice sort of string of companies under its roof that could be really valuable to some maybe large…like a company like DHL, large distribution companies. Xero, which is insanely expensive, so I’m not sure if it’s going to happen for that one. But Nearmap’s come off recently, and I think the technology itself is pretty interesting. And so Spookfish was acquired a couple of years ago by EagleView in the U.S., so there’s potential for Nearmap to be acquired as well. And NEXTDC, so there’s a few large data center providers globally that may want a bigger foothold in Australia, and the best way to play that is NEXTDC actually. So we think tech takeovers could be a returning theme in the next year. Stuart, do you talk about this one?
Stuart: Yeah. So we’re going to see… Well, I believe, Labor win the federal election in May. Childcare is a big beneficiary of that because Labor has made that a core part of their platform, is making childcare more affordable to working families. So you got to think companies like G8 Education will do well in that kind of environment. But I’ve been doing my homework on childcare now. The pandemic proved the utility of childcare to, you know, free up families to actually be able to work from home. So it’s given people a taste of it. Now they’re going to want more of it. We think Labor is gonna lose the Victorian state election that’ll be late next year. Good for business in Victoria, and particularly good for companies developing new gold mines up on the Golden Triangle of Ballarat, Bendigo, and Stawell. Even in the worst of times, not even Danny Andrews could kill off the momentum of the Victorian gold sector, but it’ll take a big leg up once he and his government are removed from office next November.
Mark: All right, and lastly uranium, but we’ve got a separate presentation on that. Yeah, it’s made a big move up. It’s sort of consolidating where it is right now. But there’s lots of, you know, news and articles out there predicting uranium to actually go up to about $80 bucks a pound. But we’ll talk about it in the next presentation, Stu, that’s on relevant energy.
Stuart: Yes. So a question from one of our subscribers, so what do you think of Paladin? Now Paladin has come off a bit lately. I really like Paladin. It’s the uranium superstar on a market that has some pretty good uranium companies. Now, what’s to like to begin with? Uranium is finding a new level. We rated it up above $50 a pound in September, came back below $40, and now it’s gradually moving sideways. It had a bit of a pennant-type formation. So if it settles down in the short term, it’ll be around where it is at the moment, before then finding the next level after that. No surprises there. You want a good clean carbon…not just carbon neutral, but yeah, carbon-nothing energy source. You’ve got to think nuclear power is a good option. So who’s Paladin? They own 75% of the Langer Heinrich Uranium Mine in Namibia. That mine has been on care and maintenance because of the low prices several years ago, but Paladin are working on a restart. Late last year, we took the view at “Stocks Down Under” that uranium was gonna have a good year, and Mark, it’s fair to say that prediction paid off in a serious way over the next few months. So we called Paladin four stars at 13 cents a share, and as of yesterday, it’s closed at 74 cents. So the investors who were paying attention to our calls on Paladin and on uranium generally did very well in the early months of 2021. Still plenty of upside here. Most of the capital’s already suck in Langer Heinrich. You only need to spend another $81 million of which the company has around half on capital cost for the restart.
When it restarts, you’re talking cost of production well below the current cash cost of uranium at $27.40 a pound. That’s not too much above for the kind of production cost they had several years ago. And when it gets up and running, it makes it a top-10 uranium company globally. So if uranium is off and running by that stage, Paladin’s a beneficiary, not just for investors here but around the world. You’ve got 17 years of life out of Langer Heinrich, but what a lot of investors don’t appreciate is after that. You’ve got three different projects collectively with a resource of about £318 million pounds, on which £140 million’s already been spent. So the next couple of uranium mines is potentially already in the hub of this one. And obviously, we think uranium’s gotta hit a lot high given the supply-demand dynamic in an environment where there’s just not enough material out there for utilities to cover their existing needs. We think uranium got to hit high from there. So take a look at Paladin, it will be a beneficiary of that.
Mark: Yeah. And then the obvious questions too, at 74 cents right now, where can this go once it’s operational?
Stuart: Well, you’ve got to think that potentially it could double again. We need to run our numbers and look at consensus to be able to make a firm judgment on that view. But think of this as a base-building period before it takes off again.
Mark: All right, good stuff. So that’s all we have for this week. Keep sending us your questions at email@example.com, and we can see if we can address them in the webinar. So any last words from you?
Stuart: Thanks for sticking with us through all of 2022. We’ll have one last webinar next week, and then that’s it for us for a little while. And if you’re not subscriber to “Stocks Down Under,” you know what to do, subscribe to “Stocks Down Under.”
Mark: All right. See you next week.