One of the challenges of being an investor is accepting short term pain for long term gain. In other words, buying stocks when they are at their lowest and most appealing means that, in the short run, the outlook for a portfolio may look rather bleak. However, through ‘buying low’, there could be an opportunity to ‘sell higher’ further down the road, which is ultimately the aim of all investors.
As such, buying shares in the resources sector right now may well not prove to be a good move for the rest of 2015. The months ahead are likely to include further falls in profit for mining and oil companies but, by investing now, investors could be setting themselves up for stunning gains in the long run.
For example, buying shares in Rio Tinto (LSE: RIO) at the present time will likely mean a tough six months for investors. That’s because the situation in China is unlikely to significantly improve in the next few months and, as such, demand for iron ore is likely to remain subdued for the remainder of 2015. Therefore, Rio Tinto’s bottom line is set to fall by as much as 50% in the current year which, while being priced in by the market, is still likely to cause investor sentiment to wane in the near term.
However, beyond this year, Rio Tinto’s prospects are surprisingly upbeat. For example, it is expected to grow its earnings by 6% next year and, while a dividend cut cannot be ruled out, its shareholder payouts are due to be covered 1.2 times by profit, which indicates that they are sustainable. Therefore, a yield of 6.4% in 2016 could act as a positive catalyst on the company’s share price and help to improve investor sentiment moving forward.
Similarly, copper miner, Antofagasta (LSE: ANTO), is also set to be hit by a major slump in its earnings. Certainly, investors have become somewhat used to falls in the South American company’s earnings, with them falling in each of the last two years. However, if Antofagasta meets current guidance it will mean that the company’s net profit has fallen by 78% in just three years.
Clearly, short-term investors will find Antofagasta hugely unappealing but, with an excellent asset base and an emerging world which is still intent on developing at a rapid rate in future years, Antofagasta remains a company with a bright future. And, with net profit set to rise by 74% next year, a turnaround could occur a lot sooner than the market currently anticipates.
Meanwhile, Tullow Oil (LSE: TLW) is transitioning from explorer to producer, with its bottom line set to rise by 127% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.1 and, with it trading on a price to book value (P/B) ratio of 0.66, it appears to be all set for an upward rerating in the long run.
Of course, the price of oil is now set to remain at sub-$50 over the medium term. That is, according to industry experts; many of whom were predicting $150+ oil just eighteen months ago. Clearly, the price of black gold is highly volatile and exceptionally unpredictable. For investors, then, this creates an opportunity to benefit by simply buying major oil companies while they are cheap and offer upbeat near term prospects. And, on this front, Tullow Oil seems to fit the bill perfectly.
