If you’re a fan of momentum stocks, few FTSE 100 companies can equal the momentum of the following two commodity giants right now. Can they continue to power ahead in 2017?
Sure of Shell
After years stuck in first gear, oil and gas giant Royal Dutch Shell (LSE: RDSB) finally showed some dash in 2016. It ended the year 51% higher, making it one of the top 10 performers on the index. It was helped by a strong end to the year, when it rose 11% in the last month alone, driven by the OPEC and non-OPEC production output freezes.
Shell’s recovery started earlier than that, with the share price climbing steadily in the wake of last January and February’s brutal sell-off. Shell was over-sold then, so has it been overbought today? Much of course depends on the price of oil, which continues to climb higher, and now tops $58 for a barrel of Brent crude, an 18-month high, after Kuwait cut production.
I’ve been sceptical about how far the oil recovery can run. There’s still a strong chance that OPEC and non-OPEC members could backslide on promises, while the US shale rig count continues to climb. The higher oil rises, the more wildcat drillers will enter the market. However, Shell is heavily exposed to the cleaner-burning liquid natural gas market, where the International Energy Agency predicts a bright future, with demand expected to rise 50% by 2040, against 12% for oil.
Shell currently trades on a forecast 15.5 times earnings, so it’s no longer cheap. The yield is still tempting at a forecast 6.3%, and safer by the day, as energy prices rise. The smooth integration of its BG Group purchase is also a feather in its cap.
One year ago, mining giant Glencore (LSE: GLEN) looked sunk. It posted an $8bn loss for 2015 as copper prices plunged on falling demand from China, forcing it to scrap its dividend while its debts piled up and investors raced for the lifeboats. Yet last year it was the second-best performing stock on the FTSE 100, rising a stonking 209%. Only fellow miner Anglo American, which also sank like a tonne of iron ore in 2015, did better, soaring an incredible 284%.
So can Glencore repeat its spectacular trick? It almost certainly can’t, given that last year it was in full rebound mode. Today, it trades at a fairly sensible 14.4 times earnings. While Shell’s prospects depend on the price of oil, Glencore is hoping that demand from China will hold up. Both will also be crossing their fingers that President-elect Donald Trump’s reflation stimulus blitz matches the hype.
Glencore’s earnings per share are forecast to grow an earth-shaking 112% this year, while its dividend should soon yield around 2.4%. It has been lifted by today’s buoyant start to the year, with the share price up 2.79% today at time of writing, as copper rallies 1% to $5,588 an ounce, helped by signs of strong growth in Chinese factory and services activity. You can’t read much into one day’s trading, but for now the force is with both Royal Dutch Shell and Glencore.