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Woodside Petroleum Ltd (ASX: WPL) shares have not had a good year. Backtrack to the dawn of 2020, and Woodside shares were flying high, going for around $36 a share. But 2020 has ravaged the oil industry, and Woodside is the ASX’s largest pureplay oil company. Between January and March, Woodside shares went from more than $36 to a low of $14.93 – a level that the company hadn’t seen since 2004.

Today, Woodside has recovered somewhat but is still trading for $21.69 at the time of writing. Even at this share price, you’d have to go back to 2005 or so to find another period of similar valuation.

Black gold no more

So why is this company at multi-decade lows? Well, it’s all about the oil. Woodside is a commodity company – it digs and drills oil out of the ground. Like most commodity companies (and unlike most other companies), Woodside has no say in what it is able to sell its product for. Oil prices are set by a homogenous global market, and no matter how ‘good’ Woodside’s oil is, it’s always going to have to accept what the market is willing to pay.

And oil has had a shocker of a 2020. Remember, back in 2018, West Texas Intermediate (WTI) crude was as high as US$75 a barrel. In January this year, WTI was going for roughly US$60 a barrel. Today, WTI is going for around US$40 a barrel, the level it has seemed to settle at since June. Back in April, the WTI oil price actually went negative for the first time in history, albeit briefly.

Simply put, this has been disastrous for the companies that produce oil like Woodside, and likely explains why the Woodside share price is still at historical lows.

Is Woodside a buy today?

However, with low prices often comes attention from value investors. We still need oil after all, whether it’s for our cars and transport, our plastics or our roads.

One broker who is extremely bullish on Woodside today is Goldman Sachs. You could even say Goldman is rating Woodside as a ‘screaming buy’ given it has a price target of $31 on Woodside shares presently. That implies a potential upside of 42% on the current share price, not including any potential dividend returns as well.

Goldman notes that Woodside’s liquidity and balance sheet remain “resilient” and tells investors that Woodside is “cheaper than its peers. trading on a ~12% free cash flow yield” right now.

More reading

• Why the Oil Search (ASX:OSH) share price is the worst performer today
• Global fund managers are bullish on these 3 things
• 5 things to watch on the ASX 200 on Thursday
• 5 things to watch on the ASX 200 on Tuesday
• ASX 200 Weekly Wrap: ASX continues to hit post-COVID highs

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post This broker reckons Woodside Petroleum (ASX:WPL) shares are a screaming buy today appeared first on Motley Fool Australia.

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In late afternoon trade the Crown Resorts Ltd (ASX: CWN) share price is on course to end the week in the red.

The casino and resorts operator’s shares are currently down 1.5% to $9.32.

Why is the Crown share price dropping lower today?

Investors have been selling Crown’s shares on Friday after a leading ratings agency downgraded its issuer rating.

According to the release, Moody’s Investors Service has informed the company that it has downgraded its issuer rating from Baa2 to Baa3.

Furthermore, the ratings agency has advised Crown that the Baa3 rating remains on review and could still be downgraded again in the future.

In light of this downgrade, Crown has revealed that there will be an increase in its interest costs.

The company explained that the interest costs associated with its Euro Medium Term Notes will now increase by approximately US$1 million per annum.

After which, a further downgrade would entitle the noteholder of Crown’s Euro Medium Term Notes to elect to redeem the notes with a make whole.

Why did Moody’s downgrade Crown?

Moody’s revealed that it made the move following the decision by the New South Wales Independent Liquor and Gaming Authority (ILGA) to defer its consideration on a number of applications required for the opening of gaming operations at Crown Sydney until February 2021.

The company was previous intending to open Crown Sydney’s gaming and non-gaming operations from December 2020.

Moody’s Analyst, Maadhavi Barber, commented: “The downgrade reflects our opinion that there is an increasing likelihood of material downside implications from the escalating regulatory investigations Crown is facing. In particular, the review will focus on the potential for further material negative outcomes that could not only affect the license for Crown Sydney, but could also bring forth regulatory challenges to Crown’s other licenses.”

Moody’s notes that Crown is currently being investigated following negative media reports accusing it of knowingly breaching Chinese gaming laws, circumventing visa requirements, facilitating money laundering, and using junket operators with links to organised crime.

It is concerned that adverse outcomes from these investigations could potentially result in large fines and/or changes to its licensing conditions in Sydney. This could potentially be as severe as the loss of its license.

In addition to this, it notes that the review will assess the potential for adverse regulatory actions in respect of Crown’s operations in Victoria and Western Australia.

Though, the ratings agency has acknowledged that it could change its outlook rating to stable if Crown is found to be suitable, or it can action recommendations made by the Commissioner for the NSW Inquiry and ILGA, to maintain its Sydney gaming license.

More reading

• Why a2 Milk, Crown, Immutep, & Suncorp shares are dropping lower
• ASX 200 down 0.3%: Altium FY 2021 guidance, Crown drops, insurance shares sink
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 rises again on Wednesday
• Crown (ASX:CWN) share price on watch after being told to delay Crown Sydney opening

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Japara Healthcare Ltd (ASX: JHC) share price is rocketing today, up 23.39% to 76 cents a share at the time of writing. Japara shares closed at 62 cents yesterday, but opened at 71 cents a share this morning and have since risen to the current level, giving this company a market capitalisation of $199 million on current prices.

Today’s moves will no doubt offer some relief for Japara shareholders, who have had to watch the Japara share price relentlessly slide over the past 5 years. Back in late 2015, this company was commanding a share price of $3.40, but it has been very much downhill from there.

Japara shares are still down 25% year to date in 2020 on the current share price, and down more than 78% from the 2015 highs. Even so, you only have to go back to September this year to find this company at an all-time low of 34 cents a share. That also means Japara is up 112% since 25 September.

A closer look at Japara

Japara describes itself as “one of the largest and most respected providers of residential aged care and retirement living in Australia” as well as “a leader in the specialist field of dementia care.”

Japara has more around 4,000 people in its care, and more than 6,000 staff employed. The company has a portfolio of 50 homes/centres across 5 states.

Like many aged care providers in 2020, Japara has had a tough year. Its annual general meeting was held last month, in which the company told investors that it reported a net loss of $292.1 million for the second half of FY2020, compared to a profit of $16 million over the same period last year.

In the meeting, Japara also declined to provide guidance for FY21, noting the ongoing uncertainties of the coronavirus pandemic. The company noted that short-term expenses are expected to continue to climb as Japara shells out on staff training, protective equipment and sanitation. It also stated that no further property developments will commence until the pandemic outlook improves.

However, it wasn’t all bad news. Japara also reported that its occupancy rate (as at 25 October) was sitting at 87.6% – the highest occupancy in the industry right now, according to the company.

Why is the Japara share price rocketing today?

It’s been an interesting day for Japara, given there is no major ASX releases or news out of the company. In fact, the last official release from Japara came out a week ago, and told us that one of the company’s directors had just picked up a large tranche of shares. 

So what’s going on?

Well, another aged care provider has been in the news yesterday and today – Regis Healthcare Ltd (ASX: REG). Regis shares attracted some attention this morning when they opened 18.3% higher. The catalyst? A takeover bid from Washington H. Soul Pattinson & Co Ltd (ASX: SOL) announced after market close yesterday.

Although the bid (offering $1.85 a share) for Regis was rejected by the company this morning, it appears it has also triggered a sector-wide re-rating. That view was discussed by my Fool colleague Brendon Lau earlier today, who noted that Regis, Japara, and Estia Health Ltd (ASX: EHE) shares have all exploded on this news following some positive broker notes on the subject.

More reading

• Why the Oil Search (ASX:OSH) share price is the worst performer today
• Why Kogan, Oil Search, Orica, & Soul Pattinson shares are dropping lower
• Why Accent, Mesoblast, Redbubble, & Regis Healthcare shares are charging higher
• Takeover battle for Regis (ASX:REG) share price triggers sector-wide upgrade
• Here’s why the Regis (ASX:REG) share price has soared by 21% today

Motley Fool contributor Sebastian Bowen owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Australia’s top brokers have been busy adjusting their estimates and recommendations again, leading to the release of a large number of broker notes this week.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these ASX shares are in the buy zone:

A2 Milk Company Ltd (ASX: A2M)

According to a note out of Morgans, its analysts have retained their add rating but reduced their price target on this infant formula and fresh milk company’s shares to $17.28. This follows the release of an update at its annual general meeting earlier this week. While Morgans has concerns over a2 Milk’s ability to achieve its guidance in FY 2021, it believes the weakness it is experiencing now is only temporary. In addition to this, it sees the recent pullback in the a2 Milk share price as a buying opportunity for investors. The company’s shares are trading at $13.88 this afternoon.

Aventus Group (ASX: AVN)

A note out of Macquarie reveals that its analysts have retained their outperform rating and lifted the price target on this retail centre operator’s shares to $2.93. The broker was pleased with Aventus’ guidance for FY 2021, which was broadly in line with its own estimates. In addition to this, Macquarie likes Aventus due to its favourable tenant mix. It is also expecting the company to pay a full year distribution of 16.7 cents per share. Based on the current Aventus share price of $2.70, this equates to a generous 6.2% distribution yield.

SEEK Limited (ASX: SEK)

Analysts at Credit Suisse have retained their outperform rating and lifted their price target on this job listings company’s shares to $28.50. This follows the release of an update by SEEK this week at its annual general meeting. SEEK has lifted its guidance after a stronger than expected rebound in its performance across a number of markets. This update went down well with Credit Suisse, underpinning its price target increase. The SEEK share price is changing hands for $25.49 on Friday.

More reading

• Why Accent, Mesoblast, Redbubble, & Regis Healthcare shares are charging higher
• Broker retains $20 price target on A2 Milk (ASX:A2M) share price
• Redbubble (ASX:RBL) share price on watch after naming former SEEK exec as new CEO
• 2 high quality ASX dividend shares to buy today
• ASX 200 rises on mixed Thursday

Motley Fool contributor James Mickleboro owns shares of SEEK Limited. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool Australia has recommended AVENTUS RE UNIT and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Kazia Therapeutics Ltd (ASX: KZA) share price is one of the best performers on the ASX this past month, almost doubling in value before retreating today by 12% to $1.53. Overall, the drugmaker’s share price has gained over 82% during the past month of trading. 

Why the big rise in the Kazia share price

Kazia is a Sydney-based, oncology-focused biotechnology drugmaker. The company’s flagship is the paxalisib drug used for the treatment of glioblastoma, which is the most common and aggressive form of primary brain cancer. The Kazia share price has risen strongly on the back of the ongoing and promising development of this particular drug. 

In August, paxalisib was granted a fast track designation (FTD) by the United States Food and Drug Administration (FDA). This designation was a significant first step for the development of the drug, as it allowed Kazia to get better access to the FDA, including opportunities for face-to-face consultations throughout paxalisib’s development. 

Later that month, it was again announced that the FDA has also awarded the rare pediatric disease designation (RPDD) to paxalisib. This designation would allow the company to receive a priority grant from the US government for the treatment of intrinsic pontine glioma, a rare and highly-aggressive childhood brain cancer.

And just two days ago, Kazia released an announcement to the market confirming that the phase-2 studies of Paxalisib has returned highly consistent results against prior data. In the release, the company says that the paxalisib compares favourably to temozolomide, the existing FDA-approved standard of care drug. The results showed that the median progression-free survival (PFS) is 8.4 months (versus 5.3 months for temozolomide), and the median overall survival (OS) is 17.5 months (versus 12.7 months for temozolomide).

What about the Kazia share price in 2020?

As mentioned earlier, the Kazia share price has risen by around 82% during the past month. On a year-to-date basis, the Kazia share price has surged by almost 170%. At the current share price of $1.53, it commands a market cap of $220 million. 

Kazia is dual listed, and has a listing on Nasdaq under Kazia Therapeutics Limited (NASDAQ: KZIA). That share price has risen by over 100% during the past month.

More reading

• Here’s how the voting went down at the Kogan (ASX:KGN) AGM
• Here’s why the Clover (ASX:CLV) share price is rising today
• Why the Oil Search (ASX:OSH) share price is the worst performer today
• Why Kogan, Oil Search, Orica, & Soul Pattinson shares are dropping lower
• What would it take for the ASX 200 to hit 7,000 again?

Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why has the Kazia Therapeutics (ASX:KZA) share price skyrocketed 80% in 1 month? appeared first on Motley Fool Australia.

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The Kogan.com Ltd (ASX: KGN) share price has come under pressure on the day of its annual general meeting (AGM).

In afternoon trade the ecommerce company’s shares are down over 3% to $17.72.

How did the voting go at the AGM?

As readers might be aware, there was a lot of controversy over Kogan’s AGM this year due to its plan to issue options to its Chief Executive Officer, Ruslan Kogan, and its Chief Financial Officer, David Shafer.

The Kogan board was wanting to grant 3.6 million share options to Mr Kogan and a further 2.4 million share options to Mr Shafer. These retention options, as they have called them, have been proposed as an incentive for the two executives to stay with the company for the next three years.

They will be exercisable for $5.29 per share in three years if the executives remain with the company.

This means for ~$19 million and ~$12.7 million, respectively, the two directors can convert these options into shares worth ~$93.7 million and ~$42.5 million, respectively, at today’s market price.

This plan did not go down well with many investors and particularly proxy advisors, who urged shareholders to vote against the issuing of these options at its AGM.

Though, for extra controversy, the Kogan board suggested it would just buy the shares on-market in the future and gift them to the executives if shareholders voted against their issue at the AGM.

But that won’t need to the case, because today Kogan shareholders narrowly voted in favour of the issue of these options.

According to the release, 56.35% of votes were in favour of granting options to Mr Kogan and 56.3% of votes were in favour of granting options to Mr Shafer.

Remuneration report receives a first strike.

Proxy advisers may not have been able to block the options from being granted, but they delivered Kogan a first strike for its remuneration report.

A total of 43.74% votes were against the report according to the release (compared to the 25% required for a strike). This means that if Kogan receives a second strike next year, the Kogan board could be voted out of office.

The company’s Chairman, Greg Ridder, was perplexed by the strike. Prior to the vote, he commented: “Based on Proxies received to-date, the vote on adopting the Remuneration Report is also interesting.”

“For a company that delivered strong returns in FY20; was right at the top of performance relative to peers and ASX200 companies; did not pay any LTI to Executive Directors; and had Executive Directors with their pay at the bottom of the peer set (many of whom didn’t generate positive shareholder returns), it was perplexing to see proxy advisers recommend a vote AGAINST the adoption of the Remuneration Report, and for many super funds to follow the proxy advisers’ recommendations.”

“While the Remuneration Report is retrospective, it appears many of the votes received are prospective and we will receive a “strike”, albeit that – based on Proxies – it does seem that a majority of Shareholders are in favour of adopting the report,” he added.

More reading

• Why Kogan, Oil Search, Orica, & Soul Pattinson shares are dropping lower
• Kogan (ASX:KGN) share price lower on AGM and trading update
• Tussle at Kogan (ASX:KGN) over executive compensations
• Why ASX tech shares should fly long after this crisis is over
• Dow Jones hits new record highs. Are ASX 200 shares next?

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Here’s how the voting went down at the Kogan (ASX:KGN) AGM appeared first on Motley Fool Australia.

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The Clover Corporation Limited (ASX: CLV) share price is trading higher by 1.10% today, after the company announced in its annual general meeting (AGM) that it has a pipeline of new product releases, and that it has won additional business in FY21.

What was said in today’s AGM?

Clover says that during FY20, it has faced incredible hardship with bushfires, COVID‐19, and regulatory challenges. Despite all that, the company says it was still able to deliver a solid result for the full year, which was announced in September.

Clover reported a revenue growth of 15% to $88 million, and a 35% increase in its earnings before interest, tax, depreciation and amortisation (EBITDA) to $18.9 million for the full year. The company says that it achieved those results without receiving any government support such as JobKeeper.

Clover highlighted that although the underlying demand in the infant formula market remains strong, it has experienced reduced orders for the first quarter FY21. The company says it is now reiterating its previous advice released to the market on 20 October, which stated that revenues for the first half FY21 would be down 15% to 25% to previous year.

On the day of that announcement, the Clover share price dropped by 20%. 

Where future growth will come from

Clover announced its strategic growth plan for the coming years. It says that its research and development department is about to release a range of new products that will help to deliver growth in the future. It also says that its concentrated powders have won additional business in a range of new applications across bread, yoghurt, health bars and sport nutrition.

In addition, the company has participated in clinical trial work to prove the health benefits of docosahexaenoic acid (DHA), adding to the credibility of Clover’s product use and applications. DHA is an omega-3 fatty acid that is a primary structural component of the human brain, cerebral cortex, skin, and retina.

Clover says that it will continue to grow its sales across all geographical markets and food segments. The company is currently selling into Asia, the European Union and the US.

More reading

• Here’s why the Clover (ASX:CLV) share price crashed 20% lower today

Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Clover Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Oil Search Limited (ASX: OSH) share price crashed on Friday after brokers downgraded their recommendation on the stock.

The Oil Search share price tumbled 5.6% during lunch time trade to $3.52 – making it the worst performer on the S&P/ASX 200 Index (Index:^AXJO).

In case you are wondering, the Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) share price is the second worst with a 4.1% slump after Regis Healthcare Ltd (ASX: REG) rejected its takeover offer.

The Orica Ltd (ASX: ORI) share price is in third position with a 4% drop to $16.30 after it posted a disappointing profit result.

Oil Search share price slumps on broker downgrades

However, it was the OSH share price that’s holding the wooden spoon even as the oil price inched up. This is because at least two brokers cut their rating on the stock following its 2020 Investor Day event.

Management didn’t reveal anything untoward. In fact, JP Morgan noted a few positive bits of news including a sizable lift in OSH’s estimated resources in Alaska.

The estimated 2C resources at its Alaska project was increased to 968 million barrels of oil equivalent (mmbbl) on a gross basis. The key driver for the upgrade came from the satellite deposits.

Oil Search also received the green light from its joint-venture partners for the Papua LNG project.

Good news priced into the OSH share price

“Notwithstanding these positive outcomes, the stock price has increased 49% this month alone (ASX200 +10%) and is now in line with our revised NPV so we downgrade to Neutral,” said JP Morgan.

The broker isn’t alone in thinking the stock has shot up to fair value. UBS also downgraded the stock to “neutral” from “buy” as it believes the stock is pricing in an oil price of US$58 a barrel, the highest among the energy stocks under its coverage.

How the OSH share price compares to the oil price

The Brent crude price is currently trading at US$44.21 a barrel after it crashed by around 27% over the past year.

“At the current price, the market is paying A$0.93/sh for exposure to growth projects in Alaska and Papua LNG with an FID [final investment decision] on either unlikely within 12 months, we move Oil Search to least preferred across our Energy coverage,” said UBS.

Despite the recent jump in the Oil Search share price, the stock is still the worst performer among its large cap peers.

Oil Search lost 52% of its value over the past 12 months. The Woodside Petroleum Limited (ASX: WPL) share price fell 36% and the Santos Ltd (ASX: STO) share price surrendered 27% of its value.

More reading

• Why Kogan, Oil Search, Orica, & Soul Pattinson shares are dropping lower
• What would it take for the ASX 200 to hit 7,000 again?
• Why Accent, Mesoblast, Redbubble, & Regis Healthcare shares are charging higher
• Takeover battle for Regis (ASX:REG) share price triggers sector-wide upgrade
• ASX 200 up 0.1%: CBA’s APRA update, Mesoblast rockets, Oil Search sinks

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The S&P/ASX 200 Index (ASX: XJO) has fought back from a weak start and is on course to end the week on a positive note. In afternoon trade the benchmark index is up 0.2% to 6,559 points.

Four shares that have failed to follow the market higher today are listed below. Here’s why they are dropping lower:

Kogan.com Ltd (ASX: KGN)

The Kogan share price is down over 2% to $17.91. This morning the ecommerce company held its annual general meeting and defended the issuing of options to its CEO and CFO. The options were narrowly approved by shareholders. However, its renumeration report was given a first strike with 43.74% votes against it. Kogan also provided a trading update which revealed that its strong growth has continued during the first four months of FY 2021, albeit at a slightly slower rate to the first two months.

Oil Search Limited (ASX: OSH)

The Oil Search share price has fallen 5% to $3.54. This follows a touch of weakness in oil prices overnight and the release of a bearish broker note out of Credit Suisse this morning. Its analysts have downgraded the energy producer’s shares to an underperform rating with a $3.10 price target.

Orica Ltd (ASX: ORI)

The Orica share price has dropped 4% to $16.29 following the release of its full year results. For the 12 months ended 30 September, the commercial explosives company reported a 31% decline in net profit after tax to $168 million. Orica’s Chief Executive, Alberto Calderon, advised that the company was battling extremely difficult conditions as COVID-19 severely impacted its customers in the emerging markets countries.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

The Washington H. Soul Pattinson share price has fallen 4% to $28.02 after Regis Healthcare Ltd (ASX: REG) rejected its takeover approach. The investment house tabled an offer of $1.85 per share, but the aged care operator believes it undervalues the company. Judging by the share price reaction, Washington H. Soul Pattinson shareholders don’t appear keen on the move.

More reading

• Why Accent, Mesoblast, Redbubble, & Regis Healthcare shares are charging higher
• Takeover battle for Regis (ASX:REG) share price triggers sector-wide upgrade
• ASX 200 up 0.1%: CBA’s APRA update, Mesoblast rockets, Oil Search sinks
• Here’s why the Regis (ASX:REG) share price has soared by 21% today
• The Orica (ASX:ORI) share price falling, profits down 31%

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Today, the S&P/ASX 200 Index (ASX: XJO) has reached a new post-March high of 6,562 points. That’s 6% higher than where the index was a month ago, 17.6% higher than where it was 6 months ago and 44% higher than the low point we saw on 23 March during the coronavirus-induced market crash. However, it’s also 2% below the level the ASX 200 started 2020 at, and 8.5% below the all-time high of 7,162 points it reached in February.

Yes, the ASX 200 has only crossed 7,000 points at one period in its entire history, and that was for a period of fewer than 2 months at the start of this year.

So what would it take for the ASX 200 to go back over 7,000 points?  One might think, due to the effects and maladies from the coronavirus pandemic, that reaching a pre-pandemic stock market high is unfeasible in the current climate.

However, that view could be rendered moot by looking at the United States markets right now. The Dow Jones Industrial Average Index (DJX: .DJI) (one of the benchmark indexes for the US markets) has just made a new high. Not a 2-month or a 6-month high, but an all-time high. On Monday this week, the Dow closed at 29,950 points, a level it has never closed at or above in history, including the ‘golden’, pre-COVID months of January and February this year.

Why the markets are surging to new highs might be a question for another time, but let’s see what would need to happen for the ASX 200 to follow the Dow and make new highs of its own.

How do banks fit into the ASX 200?

The ASX 200 is a market capitalisation-weighted index. This means that the largest companies (by market cap) within the index have the most influence on the index. To illustrate, the ASX 200’s largest holding is CSL Limited (ASX: CSL) with a 7.78% weighting. The smallest constituent is Western Areas Ltd (ASX: WSA) with a 0.03% weighting. That means if CSL goes up 2% on any day, it’s going to have more of an impact on the ASX 200 than if Western Areas goes up 200%.

Together, the top 10 shares in the ASX 200 make up roughly 43% of the total weighting. Of those top 10, 5 are banks: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and Macquarie Group Ltd (ASX: MQG).

Together, these ASX bank shares have a collective weighting of 21.4% in the ASX 200. Why is this important? Well, because all 5 of these companies (we might make an exception to Macquarie here), operate in the same industry, in the same market and under the same conditions. The big four especially have an oligopolistic hold on the Australian retail banking market. That, in turn, means the factors that affect one bank’s share price are likely to affect them all.

For the ASX 200 to reach 7,000 points, it’s likely that the ASX banking sector will need to carry the load, as it were. Remember, last time the ASX 200 was over 7,000 points, the big four were trading with valuations far above what we see today.

Foolish takeaway

Looking at the numbers, a logical conclusion could draw us to this scenario: the only way the ASX 200 is going to go back over 7,000 points is if the ASX banks appreciate considerably, or else the rest of the ASX 200 has an exceptional growth period and picks up the slack.

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Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post What would it take for the ASX 200 to hit 7,000 again? appeared first on Motley Fool Australia.

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