I suspect I’m not alone in keeping a close eye on the resources sector right now. At some point, there will surely be an enduring contrarian opportunity.
Diversified resource producer and marketing operation Glencore (LSE: GLEN), for example, has seen its share price plummet around 80% this year. If the share price can recover some of that previous ground, investors taking the plunge now could do very well.
Doing a lot of things right
When commodity price falls began to bite, Glencore found its high debt load problematic. However, the firm was quick to act with a placing in September to help pay some of the borrowings off. On top of that, the company reduced some of its zinc production to preserve resources in the ground until prices improve, and plans to sell off some of its copper mines to raise more cash. The firm appears to be doing a lot of things right if it is to survive the current harsh trading environment.
In a recent trading update, Glencore said it is targeting debt reduction that will take its borrowings down to $18bn to $19bn by the end of 2016. Citing free cash flow of £2bn, Glencore thinks the debt is manageable and argues that it is well prepared for current or even lower commodity prices. The directors point to the firm’s marketing operation, which they say is a low risk defensive earnings driver, and it’s something that the other big diversified miners on the London stock market don’t usually have.
Maybe Glencore is in no immediate danger of going bust, but I’m holding back on investing because the shares still seem to be falling. I want evidence that the slide has reversed or at least halted before I’ll even think about piling into the shares.
A ‘hidden’ growth driver
I’m more attracted to Ftse Small Cap firm McBride (LSE: MCB), which is a private label household and personal care products provider. Although the firm’s core business is to make products for retailers to sell under their own brand names, there is an interesting potential growth driver ‘hidden’ within the firm’s operations.
Indeed, McBride has a growing portfolio of its own successful brands within its Household and Personal Care categories. The firm reckons its own brands — names such as Gentelle, Ovenpride, Limlite, Surcare and Aveva — make a significant contribution to profits. The directors see a particular opportunity because McBride’s own brands are important in emerging markets where private label is in its infancy.
In contrast to Glencore’s travails, we’ve seen McBride’s shares rise by more than 80% during 2015, and I think there could be more to come next year. City analysts following the firm expect earnings to put on 19% year to June 2016, and the current 146p share price means the company trades with forward price-to-earnings ratio around 15. McBride seems well worth further research and I reckon it could beat Glencore on total investor returns during 2016.
