Few investors would have predicted that by this month, Glencore (LSE: GLEN) would have posted capital gains of 50% since the start of the year. However, a combination of factors have caused the resources major to post a stunning return and looking ahead, there could be further gains on the cards.
Clearly, investor sentiment towards the wider resources sector has had a hugely positive impact on Glencore’s valuation. Commodity prices may not have staged a stunning comeback just yet, but they appear to have at least stabilised after their woeful 2015 and challenging start to 2016. While further price gains can’t be guaranteed, there’s at least the potential for a gradual rise in commodity prices as the forces of supply and demand begin to shift further towards equilibrium.
In addition, Glencore has benefitted from what appears to be a sound strategy to improve the financial soundness of its business. Last year there was some concern among investors regarding Glencore’s balance sheet and specifically the extent to which it was indebted. In response, Glencore launched a range of measures to reduce its debt and with asset disposals and cost-cutting measures seemingly on track to cut Glencore’s leverage, it seems to be moving in the right direction. Further progress could lead to additional capital gains for its investors.
Share price rise ahead?
With Glencore forecast to return to profitability in the current year, it trades on a forward price-to-earnings (P/E) ratio of 34. While this may appear to be rather high, Glencore is forecast to increase its bottom line by 66% in the next financial year. This puts it on a price-to-earnings-growth (PEG) ratio of just 0.5 and this indicates that Glencore’s share price could rise by 50%-plus over the medium term. That’s particularly the case since investors don’t yet appear to have fully factored-in Glencore’s expected rise in profitability next year.
Certainly, there’s scope for a downgrade to Glencore’s upbeat guidance and with results being heavily dependent on commodity prices, Glencore’s rising profitability could come under pressure in 2017. However, with the company having a wide margin of safety, it appears to be worthy of investment for the long term.
In the short term, of course, Glencore remains a highly volatile stock to own. Evidence of this can be seen in its share price performance of the last week, with it falling by 11% in just five days as the wider resources sector was sold-off by investors. Therefore, Glencore may only be of real interest to less risk-averse investors, but this doesn’t detract from its rather enticing risk/reward ratio. Therefore, even after gains of 50% in just over four months, Glencore is relatively appealing and could repeat those gains over the medium-to-long term.
