It’s that time of the year again, the much-touted ‘Santa rally’ is nearly upon us. Luckily, for observant investors, there are plenty of bargains around to be snapped up before the rally begins.
Economic worries
BHP Billiton (LSE: BLT) has suffered this year as the Chinese economy starts to cool and commodity prices have taken a dive. As the world’s largest diversified miner, falling commodity prices are almost certainly going to impact BHP’s full-year earnings and this is way investors have jumped ship.
However, in my opinion, investors have acted too quickly and have ignored the fact that as the world’s largest diversified miner, BHP is not going to disappear overnight.
Actually, over the long term BHP is likely to profit from falling commodity prices as smaller, high-cost peers are pushed out of the market, reducing the supply of key resources.
But why could BHP be set to benefit from a Santa rally? Well, after recent declines the company has fallen off most investors’ radar as so much negative news coverage has depressed BHP’s valuation. Indeed, at present levels the company trades at a forward P/E of 12.8 and offers a dividend yield of 4.7%.
As investors realise how undervalued BHP has become, compared to the wider market, they could rush to buy the company’s shares.
Linked to the oil price
Like many of its peers in the oil & gas producers sector, Tullow Oil’s (LSE: TLW) share price has tracked the price of oil lower over the past six months. To a certain extent this is good news.
Tullow’s shares have been overvalued for some time, and now the company’s valuation has fallen back to earth, the shares are starting to become attractive again.
For example, City analyst believe that Tullow will exit 2014 pumping 120,000 barrels of oil per day, giving the company plenty of cash to fund future exploration projects. Further, Tullow has traditionally traded at a premium valuation due to the company’s high-quality exploration portfolio.
This premium has now evaporated, giving investors a free option on the upside exploration potential still held within Tullow’s portfolio of exploration assets. Moreover, there’s the possibility that Tullow’s recent declines have made the company attractive to larger peers as an acquisition target.
A possible bid, recovery in the oil price and increasing production are all reasons why Tullow could surge in a Santa rally.
Income and value
M&A activity is also a reason why BP (LSE: BP) (NYSE: BP.US) could see its shares charge higher in a Santa rally.
There has been talk of a possible bid for BP for some time now. However, the mounting number of challenges facing the company has put many potential suitors off.
Nevertheless, after recent declines BP is now one of the cheapest major integrated oil companies. On a per barrel basis, BP’s current implied reserve value is around $12.60, a full 55% below the average of its peers. Additionally, analysts believe that any potential merger between BP and a larger peer would generate nearly $10bn in cost savings — more than enough to justify a significant merger premium.
Still, even if BP fails to find a suitor, the company is a great investment at present levels. The company currently supports a dividend yield of 5.5% and the group trades at a forward P/E of 9.9.
