Dundee Foresees Impending Breakout for Resource Stocks

Source:

“Resource stocks have returned to an important crossroad after rebounding from their November lows and a price breakout is imminent. . .”

“While indicators still point to soft demand for commodities, capital expenditure cuts and a weaker U.S. dollar have helped energy and material equities back to their 40-week moving average,” according to Dundee Securities portfolio strategist Martin Roberge.

“Rapidly falling commodity prices (down more than 50% from their peak last summer) have forced resource companies to curb supply drastically,” Roberge said, adding that they have not yet reduced capex to 2001 recession levels.

At the same time, the interest coverage ratio (EBITDA/interest payments) for both the energy and material sectors is roughly double that of the last recession. This means companies have the ability to cut more capacity if commodity prices decline further.

“History shows that, when it comes to relative price performance, supply direction is more important than level,” he added, noting that companies with strong cash positions are allowing them to be more disciplined with supply.

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