For many investors, resources companies may scream’ avoid’ at the present time. That’s because their performance in recent months has, in the main, been horrific. Falling commodity prices have caused their bottom lines to come under severe pressure and have meant that investor sentiment has declined significantly, pushing their share prices lower.
In the short run, things may get worse before they get better. Uncertainty regarding Chinese growth and a glut in the supply of a number of commodities means that the industry’s performance is likely to remain volatile in the weeks and months ahead. However, the valuations on offer mean that for investors looking at the long term, now could be a great time to buy.
For example, Glencore (LSE: GLEN) may have experienced a very challenging period in recent years, with its bottom line falling by 72% in the last three years. However, next year is due to be much improved for the diversified miner, with it being expected to increase its earnings by as much as 47% in 2016. This puts it on a forward price to earnings (P/E) ratio of just 9.5, which indicates that there is significant scope for an upward rerating over the medium term.
Furthermore, Glencore’s appealing valuation suggests that it offers a relatively wide margin of safety. As a result, if the company’s earnings disappoint over the medium term, its share price may not fall as heavily as would normally be the case. And, if its financial performance does surprise on the upside then Glencore could post stunning gains over the medium to long term.
Likewise, Tullow Oil (LSE: TLW) appears to be unjustifiably cheap at the present time. For example, it trades on a price to earnings growth (PEG) ratio of just 0.1, which indicates that its shares are well-worth buying. Certainly, its financial performance has been rather volatile in recent years, with its pretax profit ranging from a loss of over $2bn to a profit of over $1bn during the last five years. During this time, Tullow Oil’s share price has declined by 82%, which indicates that investor sentiment is very weak. However, with its bottom line due to rise by over 300% next year, it appears to be a logical purchase at the present time for investors who can accept above average levels of volatility.
Meanwhile, Aquarius Platinum (LSE: AQP) has bucked the recent trend among resources stocks to post a share price gain of 40% in the last month. And, while the precious metals miner is restructuring its business and selling off non-core assets, its financial performance in the last four years has been disappointing, with the company recording a pretax loss in each of the four years.
However, with a pretax profit of over £11m being forecast for next year, it appears as though the market’s view of the company is beginning to shift. And, while the short to medium term is likely to remain volatile for the business, with the price of precious metals having the potential to remain weak, Aquarius Platinum’s longer term future appears to be bright and potentially highly profitable.
