This week’s S&P/ASX Indices rebalance announcement reminded us how investment trends come and go. Red hot one minute, forgotten the next. Stocks going in and out of the ASX100 over time represent a telling history of the Australian market. It also demonstrates the different dynamic of investing in small caps (ex 100) versus big caps (top 100).
The stock that prompted our thoughts is Whitehaven Coal (WHC). It seems like yesterday that every man and his dog was shutting down or trying to flog their coal operations. Coal prices were hit very hard on the back of weaker economies around the world as far back as 2011 and thermal coal had the added pressure of the move towards cleaner energy sources. The slump, at least as WHC was concerned, lasted more than five years. The company nearly went out the back door.
Whitehaven Coal Share Price Chart
And then, just like that, it’s heading into the ASX100. All is fixed apparently. Thermal coal prices have risen on the back of energy demand out of China and India and earnings are soaring. Because of the carnage since 2011 there’s less coal stocks around to play in these days which means the ones left are grabbing plenty of attention.
It also demonstrates how small cap investors carry the load. That comes with added risk but also the potential for super returns (WHC is nearly a 15-bagger in less than 2.5 years). Small cap investors, eg Glennon, search for stocks that can make it into the top 100. It’s the holy grail.
But by the time they get there they are either in a more mature state or have become way overpriced because of a cycle or some sectoral hype. Large cap investors are typically reluctant to jump straight in and have the advantage of forming a fresh view. It’s a moment of truth for many companies and plenty don’t make it.
A2 Milk (A2M) entered the ASX100 in December last year and, apart from a share price spike on the back of a good interim result, has not gained a lot of traction. Performance in the last three months has been pretty weak. Clearly big cap investors are not sharing the love exuded by their small cap counterparts. Perhaps the law of large numbers plays its part too, the initial success becoming harder to replicate as the numbers (and expectations get bigger).
A2 Milk Share Price Chart
If we go way back in time we can look at ABC Learning, which was a real darling and stormed into the ASX100 for some short-lived glory before being un-ceremonially dumped. And we know the end of that story. It makes us think of the numerous childcare stories running around the market at the moment and the important lessons learned with regard to sectors that become overly crowded, particularly those that rely on government assistance.
And just having a big name is not going to keep a company at the top. We noticed Myer has just gone out of the ASX200.
Given the ructions prompted by the Banking Royal Commission we wonder if we’ll ever see one of the major banks leave the top 100. Probably not, but AMP and Telstra could be a different matter. Structural weakness can bring down even the biggest.
The history of the ASX indices carries valuable lessons for the future.