Sell the big four banks and buy this ASX lithium share: broker

It has been a relatively strong year for the big four banks in 2022, with only one of them in negative territory year to date.

Investors have been buying Commonwealth Bank of Australia (ASX: CBA) and co thanks to the impact that rising rates have had on net interest margins.

However, one leading broker believes that now could be the time to switch out of the big four and into battery materials.

According to a recent note out of Wilsons, its analysts “now see more headwinds for earnings than tailwinds.”

As a result, they fear that the market may be expecting too much from the banks and suspect that this could leading to bank shares underperforming in the near term.

Wilsons listed three areas of concern. It explained:

Net interest margin forecasts may be close to peaking – we think this upgrade cycle has peaked.

We are more cautious about credit growth due to a slowing economy and housing cycle – housing credit is already starting to slow at a rapid pace.

Costs have become a key risk. We think costs could keep surprising to the upside over the next 12 months.

Switching to battery materials

Wilsons had trimmed its positions in the banks and filled the gap in its portfolio with an investment in Mineral Resources Limited (ASX: MIN). It commented:

We have used the proceeds to add Mineral Resources (MIN) to the Focus Portfolio at a 3% weighting. This closes our portfolio underweight to resources which has stretched out over the last few months. Additionally, we are looking to increase our exposure to battery minerals, which we believe has significant upside potential over the next few years.

The broker has picked Mineral Resources ahead of other lithium shares due to its belief that the market is undervaluing its lithium operations. Wilsons also notes that these “hidden value” plays have the potential to generate strong gains regardless of what is happening in the market. It explained:

MIN is one of the highest-quality mining and mining services companies on the ASX. The potential spin-off of its lithium assets could provide substantial returns for investors as the lithium segment is markedly undervalued by the market in the current group structure.

We are attracted towards ‘hidden value’ plays like this as they can provide above-market returns that are less correlated to the rest of the market (and in this case the lithium/ resources sector).

The post Sell the big four banks and buy this ASX lithium share: broker appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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