Suffice it to say, being an investor in resource-focused stocks has been a miserable experience in 2015. The profitability of the sector’s incumbents has taken a major hit as the prices of commodities have tumbled. This has led to a huge weakening in investor sentiment which, while disappointing, could present an opportunity.
In fact, a number of resource-focused stocks not only appear to be cheap at the present time, but they’re also putting in place sound strategies through which to overcome their current predicaments. For example, in the case of Rio Tinto (LSE: RIO) it has taken steps to improve its financial standing through a reduction in capital expenditure as well as being able to generate efficiencies. Both of these steps should help it to not only survive the current crisis, but emerge in a stronger position relative to many of its peers.
Evidence of Rio Tinto’s financial strength versus many of its peers can be seen in the fact that it hasn’t yet cut its dividend. This means that, in theory at least, it’s due to yield a whopping 8.2% next year. Certainly, a dividend cut is being priced in by the market. But with Rio Tinto remaining highly profitable, having a very appealing asset base and a sound strategy, it could be worth buying now for the long term – even if 2016 proves to be yet another difficult year.
Similarly, copper miner Antofagasta (LSE: ANTO) has juggled its asset base so as to focus on its core operations and specifically on becoming increasingly efficient in a difficult period for the copper market. This has meant selling off its non-core water division, which raised $965m and therefore helped to strengthen the company’s long term financial outlook.
Clearly, the company’s profitability has taken a severe hit this year, with earnings due to fall by 58%. While disappointing, much of this fall is due to be regained next year when Antofagasta is expected to report a rise in its bottom line of 55%. And with it trading on a price-to-earnings growth (PEG) ratio of just 0.5, it appears to be a sound long term buy that may benefit from improving investor sentiment next year.
Meanwhile, support services company Petrofac (LSE: PFC) appears to offer a very wide margin of safety at the present time. It trades on a forward price-to-earnings (P/E) ratio of just 8.2. And while there is scope for a downgrade to Petrofac’s forecast earnings growth of 174% for next year, the margin of safety on offer means that now appears to be a very good time to buy a slice of the business.
Furthermore, Petrofac has excellent income potential. Certainly, the resources sector may not offer the most stable yields at the present time, but with Petrofac yielding 5.2% from a dividend that’s due to be covered 2.3 times by profit next year, it appears to be a highly enticing dividend option.
Additionally, Petrofac has released an upbeat pre-close trading update today, which shows that the company’s portfolio is operating in line with expectations. Notably, it is set to implement a major reorganisation in January 2016 which has the potential to maintain Petrofac’s cost-effectiveness and and its relatively strong competitive position. This, plus a relatively high level of revenue visibility and a record ECOM (engineering, construction, operations and maintenance) backlog reported today, means that now appears to be a sound moment to buy a slice of the company for the long term.
