From time to time, my rules-based SIF system offers me choices that go directly against my own judgements. Most often, this happens in highly cyclical sectors.
The SIF stock-buying screen does not make any attempt to time market cycles or even really recognise their existence. Instead, I simply look for evidence of modest valuation and ongoing growth.
On balance, I think this has probably been helpful in terms of generating positive returns since the portfolio’s inception. Making cyclical calls accurately is notoriously difficult. And as hedge fund legend Seth Klarman of Baupost Group once said, “being very early and being wrong look exactly the same 99% of the time”.
I’m certainly guilty of being very early on some of my sector calls. I’ve been convinced that the big miners must be near the top of the cycle for at least two years now. So far, I’ve been expensively wrong.
Of course, I’ll be right eventually. But Klarman’s words seem pretty apt here.
It’s against this backdrop that I find Anglo-Australian miner South32 at the top of my screening results this week. To emphasise the point, S32 also has a near-perfect StockRank:
I don’t currently have a miner in the SIF folio after my unscheduled ejection of Kazakhstan-focused Central Asia Metals. Should I ignore my views on the mining cycle and add South32 this week, or is now not the right time?
In the remainder of this piece I’m going to take a closer look at South32’s key metrics and the story behind the company.
South32 (LON:S32)
South32 was spun out of BHP (then called BHP Billiton) in 2015. In somewhat simplified terms, it contained the Billiton assets acquired by BHP when those two companies merged. These included coal, silver, lead, alumina, manganese and aluminium. Today we can add nickel and copper to this list.
All of South32’s assets are located in the southern hemisphere, primarily in Australia and South Africa.
The new company got off to a difficult start when commodity markets crashed in 2016. But the rapid recovery fuelled record profits in 2017. CEO Graham Kerr used the momentum (and cash) from that period to start reshaping South32’s portfolio.
Changes made so far include the sales of the group’s South African thermal coal business…
