If you ever wondered why investors scour the market for thrilling contrarian plays, take a look at Anglo American (LSE: AAL). The global mining giant was the worst performing stock on the FTSE 100 in 2015, losing around 70% of its value. And it continued to plunge at the start of this year to hit a low of 215p, a spiralling, dizzying, morale-sapping plummet from its 52-week high of 1,250p. Then, just when investors were giving up, it showed its contrariness.
Anglo American dream
Few blue-chip stocks fall this fast, and few rise as fast as Anglo American has over the last few weeks. The share price is 97% higher than it was one month ago. If you had invested at the bottom of its death plunge, you would have doubled your money. The question is where Anglo American goes next. I urge caution: what we’ve just seen is a rebound in a stock and sector that was oversold in the heat of a market meltdown. I would still hesitate to plough good money into Anglo American.
Sentiment has recovered but it could collapse just as quickly and drag down Anglo American with it. The miner has just posted a £5bn full-year loss and its net debt stands at around three times underlying earnings. Chief executive Mark Cutifani’s massive $6bn asset dump and cost savings plan may be too late, as I can’t see a sharp reversal in commodity prices given the current glut.
Optimists may point to sharply rising M3 money supply figures in China as a sign of a brighter future. Pessimists might direct them to the Baltic Dry Index, which recently fell to its lowest level since records began in 1985 as global trade slumped. Anglo-American fell 7.76% on Friday, which is the kind of volatility you have to expect going forward. It isn’t out of the woods yet.
Rolls-Royce rebound
Engine maker Rolls-Royce Holding (LSE: RR) has also raced up the gears, rising 20% in the last week alone. This offers loyal investors a rare moment of sweet relief after enduring a string of profit warnings over the past two years. The City has long complained about the company’s confusing accounting methods and unhelpful guidance, which is the type of thing you can get away with when business is booming but leaves you short of friends in a slump.
The company’s 2015 full-year results showed a 12% drop in underlying profit before tax to £1.4bn at constant exchange rates, down from £1.62bn in 2014. Markets were relieved that there was no more bad news (it’s now a whole three months since the company’s last profit warning) and shrugged-off management’s decision to reduce the dividend by half, the first cut in 25 years.
Rolls-Royce’s supporters might point to its vast order book but it still needs to turn that into steady revenues, and chief executive Warren East has a mighty restructuring job on his hands to turn this crate around. At least he has the power to change things, whereas Mark Cutifani at Anglo American is at the mercy of higher powers, namely the commodity gods.
