Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 526

In this new world, it’s time for these old world assets

Investing in unpopular stocks is a great way to make money for investors but a disciplined process is required to find uncomfortable opportunities. This is especially true in smaller companies, which have underperformed their large cap peers in 2022 and into 2023 against a backdrop of rising interest rates and a bleak economic outlook. We’ve seen this movie before. Small caps are more exposed to the economy, have less diversified businesses, and are less liquid than large caps. When the outlook starts to deteriorate, investors rush out of small caps and into large, liquid defensive stocks.

However, this underperformance has historically created an attractive entry point, as smaller companies deliver their strongest absolute and relative performance over larger companies when the economic outlook starts to improve. Small caps are now trading on a material discount to their historical relative valuations versus large caps.

The stockmarket is going through a phase when global investors are attracted to the ‘new world’ of large tech, growth companies. To find unpopular opportunities, a different framework for thinking is required. We hear a lot about new world assets, but in reality, it means higher expectations and greater potential to disappoint.

Uncomfortable opportunities in real assets

In fact, ‘old world’ assets are becoming more attractive because the barriers to building new things are getting higher. Anyone who has attempted an investment development such as residential or commercial property or a major project will know it is taking longer and it is much more expensive. There are more political constraints and fewer trades people. Interest rates are higher and competition among brands for a customer base is intense, and there’s less funding available for new businesses. Money was free a few years ago but now there’s a cost.

Newcrest Mining and Origin Energy are examples of good assets that have received attractive takeover bids in the past few months, Newcrest at a 30% premium and Origin at a 53% premium. Investors often focus on the ‘buy or build’ decision, and our view is that as the barriers go up to building new things, many existing assets become more valuable to buy rather than build.

Two old world companies the market is underestimating

Incitec Pivot (ASX:IPL) is not a household name but it's been unpopular in recent years, with the share price down from $4 to $3 in the last year. There are reasons for this, such as falling fertiliser prices, poor plant reliability and then the CEO stepped down. This is a company that turns gas into fertiliser or explosives, and when their plants don't work efficiently, they don’t make money. So it is a company that is out of favour and herein lies the opportunity. Its assets have value.

Its US fertiliser business is worth about $1.8 billion and Australian fertiliser business is about $1.4 billion, but the explosives business is what really matters. It’s valued at about $5.2 billion. The market probably understands that but underappreciates that this is radically-simplified business. In fact, they have sold the US business and there will be $1.8 billion cash on the balance sheet. They are looking at demerging or selling the Australian fertiliser business. We will be left with a pure play explosives business.

Consider the opportunity. One of the things miners must do is move material, and they need a lot of ammonium nitrate or explosives. In 2016, a huge ammonium nitrate plant was built in Western Australia. The green bars in the chart below show the market was over supplied with explosives for close to a decade. This is the type of original research we do.

How many explosives plants have been built in Australia since 2016? Zero. Miners such as BHP have been on a capex holiday and they are now increasing production, which means they are increasing movement of material. We see a large shortfall in the amount of explosives available in the Australian market. It can’t be covered by imports because explosives do not travel well, and the largest exporter of explosives was Russia with nearly half of global supply. We think this is a great time to be buying into the explosive business after 10 years of underperformance.

The second stock with some old-world characteristics is Domino’s Pizza (ASX:DMP). It was a major Covid winner in the lockdowns, but then it became a huge inflation loser. Inflation ravaged Domino's, it was among the most-impacted companies in the ASX200 from inflation. Food costs went up. Labour costs went up. Then they tried to push prices up but in a very clunky way. They added a Domino's Service Fee, the DSF they called it. It was a variable charge, like the surcharge on Uber during busy times. They had never had one before and customers started leaving. So Domino's was massively hit by inflation and issued seven profit downgrades in two years. It was a terrible time.

It’s out of favour but what is the opportunity? Domino’s makes money when they sell more pizza, and they sell more pizza by rolling out stores. And look at the following chart. They've gone from 500 stores in 2010 to 3,800 today. Even in the toughest time last year, they increased their stores by 6%. They have a very simple model with a delivery focus. It's small format so it's cheap to roll out new stores, in Australia today for about $500,000. They typically pay back in about four years, so for franchisees, this is a great investment.

We believe Domino's will revert to profit growth. They've committed to no more price increases based on what they can see, which will be more stable for customers. With store growth of about 7% per annum, and each store does a little better by about 3% per year. So it’s a business that can grow revenue at 10% a year and its earnings even higher. The inflation headwinds have created an opportunity and now they need to make the case for investing in the company.

That’s what we call an uncomfortable opportunity.

Finding comfort in the discomfort

The key takeaway is that many old world assets may be more attractive when the market is focusing more on the new world. Incitec Pivot, Domino’s, Newcrest and Origin are not large cap tech companies, and investors are overlooking them.

As Insitec Pivot becomes a simplified, pure play explosives business, and Domino's recovers from its inflation shocks, we believe both companies will move from discomfort to comfort.

 

Blake Henricks is Deputy Managing Director and Portfolio manager at Firetrail Investments. Firetrail is affiliated with Pinnacle Investment Management, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers in Firstlinks from Pinnacle and its affiliates, click here.

 

RELATED ARTICLES

Where Australia's largest ethical investor is finding opportunities

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.