The performance of Glencore (LSE: GLEN) has been disappointing in recent months. As with a number of other FTSE 100 stocks, and especially resources shares, market confidence has declined as concerns surrounding the prospects for the world economy have been the main focus of investors.
Having fallen by 28% in the last year though, Glencore may now offer a value-investing opportunity. Alongside another cheap stock, which released an encouraging update on Thursday, it could be worth buying, in my opinion.
Improving performance
The company in question is pub operator Mitchells & Butlers (LSE: MAB). Its first quarter trading update showed it was able to deliver strong performance during the festive season, with like-for-like sales growth of 9.8% recorded in the three-week Christmas trading period. For the quarter as a whole, food sales increased by 4.6% on a like-for-like basis, with drink sales moving 4.8% higher, compared to the same period a year ago.
The company continues to focus on investment in its estate. It’s aiming to improve amenities in order to provide a better customer experience. It has already completed 114 conversions and remodels in the year to date, while two new sites have been opened.
With Mitchells & Butlers having a price-to-earnings (P/E) ratio of around 8.2, it seems to offer good value for money. It appears to be making progress in attracting new customers and retaining existing ones, while investment in its estate could improve its competitive advantage. Although the prospects for the wider industry remain uncertain, the stock seems to offer a wide margin of safety at the present time.
Recovery potential
Glencore also seems to have a relatively appealing stock price valuation. Its P/E ratio stands at 7.5, which suggests that investors have factored in the risks facing the business and the wider resources industry. Even though the company is only expected to report a 1% rise in earnings in the current year, the cyclicality of the commodity industry suggests that long-term investors may experience significantly improved returns in the coming years.
After a prolonged period of global growth, investors are increasingly questioning the outlook for the world economy. There are numerous risks to growth, including poor trade relations between the US and China, the impact of rising US interest rates, and Brexit. All of these risks could cause a deterioration in growth over the medium term, and this could be negative for the financial performance and valuations of a range of commodity stocks.
However, Glencore’s falling share price could be an opportunity to capitalise on the cyclicality of the resources industry. Buying while the outlook for the company is downbeat may not lead to quick returns. But since the long-term prospects for the world economy remain bright, it may mean that investors can benefit from low valuations and a possible recovery. From a risk/reward perspective, therefore, the stock could offer significant appeal.
