The fund manager, L1 Capital, has outlined some S&P/ASX 300 Index (ASX: XKO) shares that it sees as major opportunities.
Nearly all investors know about the big ASX bank and mining shares, but there are plenty of possible market-beaters further down the market capitalisation list.
Some sold-off industrial and resource companies can be good ideas if we take a contrarian attitude at the right time.
In a recent monthly update, L1 said:
Many cyclical stocks are now trading at both depressed P/E multiples and depressed earnings bases, which provides the opportunity for substantial, medium-term upside for patient investors.
Let's look at two of the ASX 300 shares that L1 Capital highlighted.
Nexgen Energy (Canada) CDI (ASX: NXG)
This business is preparing to develop Arrow, the world's largest undeveloped uranium deposit in the Saskatchewan region of Canada. L1 said this would be a major, new, strategic Western source of uranium to help address the "looming uranium market deficit".
However, the Nexgen share price fell 20% in December amid a 5% decline in the uranium price. L1 noted that the uranium price had drifted lower over the past three months on low volume, while uranium term prices — the agreed contracted price representing almost all commercial uranium demand — have continued to hold steady in the past six months. In fact, the term price is at a 10% premium to the spot (current) price.
L1 also noted that supply risk was a key factor, with Kazatomprom and Cameco recently announcing the temporary suspension of one of the world's largest uranium operations (the Inkai joint venture in Kazakhstan) because of permit delays.
Once the project is operational, Nexgen could generate more than C$2 billion of cash flow annually, which L1 said was attractive because its market capitalisation was currently around C$6 billion.
BlueScope Steel Limited (ASX: BSL)
Steel business BlueScope is another ASX 300 share that L1 has highlighted.
The fund manager noted that the BlueScope share price fell 16% in December because of a weak global steel market. L1 explained:
Asian steel spreads remain depressed as excess Chinese steel production has resulted in elevated exports (>100mt pa annual run-rate pressuring prices across the region). US steel markets have also weakened, with end market demand impacted by ongoing uncertainty associated with the upcoming change of US government administration, as well as on the trajectory of inflation and interest rates.
Why is the steel business attractive in this environment?
L1 pointed outed that BlueScope recently announced a target of reducing costs by around $200 million across the business, recognising the need for productivity enhancements to improve "business resiliency".
The fund manager also liked that BlueScope was still focusing on growing its US business by expanding its North Star steelmaking facility and evaluating additional investment to expand its product offering further downstream.
L1 concluded its thoughts on the ASX 300 share with the following:
We continue to believe the market significantly undervalues BlueScope's unique and strategic asset base and the longer-term resilience of the largely consolidated US steel sector.
