This is how Argonaut's David Franklyn finds opportunities in a downturn. Pic: Supplied/Stockhead
The Argonaut Algorithm: How Argonaut’s top fundie David Franklyn prepares for a market correction
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Argonaut Funds Management’s David Franklyn joins Stockhead to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.
In a month dominated by cyclones both physical and metaphorical for Aussie markets, we’ve headed into territory looking and talking very much like a market correction.
The big flip has come in the tech-heavy Nasdaq 100 in the USA, where uncertainty, Trump tariffs and recession fears has deflated the tyres of a bull run led by the Magnificent Seven tech stocks.
It’s more than 13% off the record high seen on February 19, more than halfway to a technical bear market.
The Aussie benchmark ASX 200 has fallen close to 9% from its high on February 14, raising the prospect that punters may need to rethink the momentum trades – AI stocks in the States, banks in Oz – that have feathered their nests in recent years.
As markets correct, how can you protect your position and even outperform?
It’s something Argonaut Funds Management’s David Franklyn has been thinking about deeply in recent weeks.
“There’s always going to be a downturn or a correction,” he told Stockhead.
“And it’s a matter of the firm recognising that they’re part of the investing landscape and what you do about it.”
Here are his key tips for investors wondering how to trade in a falling market.
Don’t panic
Franklyn says the most important principle for investors is to have a plan in place ready to go when the correction really hits.
“The key is not to panic when the market is turning down, because often it creates opportunities as well,” he said.
“Have a plan and refine it over time.
“I think the other thing is to be aware of what’s going on in the market, right? So if you look at the US you’ve had a couple of years of very stellar performance, really driven by the tech sector and the big tech stocks more than anything else and that’s forced valuations up.
“Notwithstanding we’re investing in the resources space, you get some fear and panic in the market that’s going to impact on everything.
“So I think when you see valuations high in the market, it’s very hard to pick turning points, but you can start to prepare.”
Producers provide protection
Franklyn says a move towards quality and liquidity is an important step to consider when markets turn.
That’s not so good for small cap stocks, say $50 million or less, but in the resources context producers which are generating real cash and trade freely are genuine assets.
“You can stay invested but you move towards quality and you move towards liquidity so that if there is a correction, you’ve got that flexibility of moving to more cash if you want,” he said.
“When things look a bit expensive go to quality and liquidity and then go to bigger-cap market companies and producers which are generating money.
“You can go into developers and maintain your position in developers, but you want to be in the good quality, you want to be in the ones that that are well funded and and well advanced.“
Cut through the noise
In times like these there’s plenty of news around to confuse and distract the inexperienced investor.
The volatility of the geopolitical landscape, information overload from the Trump administration, inflation impacts and global economic uncertainty can make it hard to focus on anything but the negatives.
Franklyn says it’s important to identify conviction picks that have long-term upside regardless of the short-term noise.
“Your core positions are where you say I’m going to hold these irrespective of what happens in the market,” he said.
“I think the the standout commodity at the moment, for example, is copper, where you go there’s obviously uncertainty in what’s happening now in the US with tariffs.
But it is a standout commodity because you’ve got a number of key demand drivers such as electrification, general industrial growth but you’ve also got supply constraints.
“It’s a big market, it’s diverse, 25 million tonnes per annum. So it’s very hard for example for China to really control that market or influence price.
“And you’ve got a lot of production coming out of South America, which historically has been the subject to supply constraints.”
The East Coast gas market is another with the fundamental supply and demand set up to drive returns.
“If you look at global gas, that’s pretty volatile and linked to global growth,” Franklyn said.
“But you look at the East Coast gas markets, Victoria and New South Wales, and what you’re saying is there’s been no new projects coming on, there is a major drop off in supply and demand is still very high.
“And so you’re seeing governments there now scrambling and saying well, what do we do?
“Do we allow LNG imports etc? There’s a bit more exploration happening in Queensland, which is all good, but it’s not going to help in the next year or two years.”
“Those that are supplying into that market will do very well.”
Find sectors protected from the market
Finding outperformance, or alpha, can also come down to finding sectors that are less vulnerable to the broader economic environment.
One of those, right now, is mining services.
“An attraction of some of those mining services companies is they’re more linked to production than price,” Franklyn said.
“So you take out the big variable that really impacts on the mining sector. Now the proviso there is you want to target those commodities where Australia has a competitive advantage in producing.
“Iron ore, coal and gold in particular, where the margin is such that even if you get a pull back in the commodity price, the mines aren’t going to shut down because they’re dominant global suppliers.
“So for example we’re investing in an infrastructure play in Queensland called Dalrymple Bay Infrastructure (ASX:DBI), which has an export terminal for met coal.
“That’s a great infrastructure asset linked to low-cost, high-quality met coals, and we also own some Emeco Holdings (ASX:EHL), which is a rental business of mining equipment.
“Emeco’s three major markets are iron ore, coal and gold.”
Another area prospering right now is gold and gold equities, who remain undervalued on most analysts’ metrics despite the price hitting a record US$3000/oz on Friday.
Franklyn also recommends taking a close look at stocks with specific catalysts on the horizon.
He pointed to Bill Beament’s copper and mining services play Develop Global (ASX:DVP) as an example, with the company expected to commission its Woodlawn copper and zinc mine in New South Wales this year and complete a selldown of a minority stake which will provide illuminate the value the market places on the whole asset.
Argonaut’s stock pick of the month
Calling back to Franklyn’s conviction on East Coast gas producers, his stock of the month is Amplitude Energy, which produces and explores for gas in the Gippsland and Otway Basins off the coast of Victoria and purchased the operating Orbost onshore plant in July 2022.
“It’s arguably the best exposure to providing gas into the East Coast market at a time where prices are moving higher and it really stems from the work they’ve done over the last couple of years in positioning the business for that,” Franklyn said.
“Nobody claims that it’s been all clear sailing the last couple of years.
Firstly, they were processing through the Orbost processing facility and there were some major issues with the ramp up of that. They now seem to be resolved.
“They had some decommissioning capex that needed to be done on some old wells. And there was a real uncertainty around what that capex figure might be.
“Their budget was around $250m and that’s now complete, locked away and done on budget.
“And then the third area which is only just being resolved now, is they had a joint venture with Mitsui in the Otway Basin to drill three new wells to bring more supply on.
“Mitsui didn’t want to proceed with that. And it looks like OG Energy will come in and take over their position.”
“If you look at the uncertainties that have surrounded the stock over the last couple of years, they’ve all now been ticked, production is increasing and the benefit of fixing that issue at Orbost is it enables them to sell more of their production to the spot market, with price then moving higher and [it] should continue to move higher.”
Argonaut Funds Management is a high conviction resource sector investor managing the Argonaut Natural Resources Fund and the Argonaut Global Gold Fund. David Franklyn is the Fund Manager for the Argonaut Natural Resources Fund.
