Why I snapped up this FTSE 100 faller last week

Everyone loves to find a bargain, right? That was me, rifling through the FTSE 100 fallers last week and finding a gem.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Last week was not exactly a great one for any stock market, including the FTSE 100. The popular Footsie share index fell by over 2%, leaving it about on par with where it had been trading a year ago.

But that fall hides the fact that some shares lost a lot more than others, some for good reasons. But often these days I’ve found that share prices can tend to overreact to any news.

That’s largely because markets are short-term-focused in nature — and that can create buying opportunities for a long-term investor like me.

Looking beyond today’s news

So last week, when I saw one of the highest-dividend shares of the FTSE 100, Rio Tinto (LSE:RIO), trade down over 10%, I knew I had to figure out if it was a short-term problem or long-term opportunity.

What was driving the change — and did I think it was reasonable? Was it perhaps finally a long-term buying opportunity?

Why did Rio fall more than the FTSE 100?

Rio Tinto may be a global mining giant but it has a fairly concentrated risk exposure, with about 60% of its earnings currently derived from iron ore.

Other FTSE 100 constituents have far less exposure to this particular market. So when iron ore prices fell sharply last week, mining shares including Rio Tinto, fell in line with the sell-off, while other shares were unaffected.

Digging into the story further reveals that Chinese demand is the key driver behind iron ore prices, as it’s the biggest buyer, accounting for about 70% of the market.

So markets were correctly reacting to China’s decreasing steel mill production figures, combined with concerns that its strict policies on Covid will continue to dampen demand.

Taking the long-term view on Rio Tinto

However, when I looked at the same information from a long-term perspective, that’s when I saw my opportunity.

I believe that eventually China will figure out a way to live with Covid, like the rest of the world is slowly doing. Plus, commodity markets tend to be highly cyclical — meaning that what goes up will come down and vice-versa.

I’d never buy an oil company when oil prices are at record highs. But buying a high-quality mining company when its core product falls in price — that makes sense to me as a long-term investment.

That’s especially the case for one with a great track record of rewarding its investors with a healthy dividend rate. At a yield of over 12% at time of writing, it’s the highest-paying dividend share in the FTSE 100.

A bumpy ride ahead?

Mining shares are known for being volatile. That means I’m not expecting a smooth ride while owning my new Rio Tinto shares.

For starters, I will not be surprised if that dividend is cut as revenues fall. But even if halved, that still beats the Footsie’s average of around 4%.

Plus, I like the strategy I can see unfolding at Rio with it developing new markets for its other products. That’s going to help decrease its reliance on iron ore prices and China over time and diversify my risk.

I may have to wait, of course. But over the long-term, I think it should prove a great addition to my diversified portfolio. That’s why I bought this FTSE 100 faller last week.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Michelle Freeman owns shares in Rio Tinto Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to consider buying in July [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

Warren Buffett’s Berkshire Hathaway dumped this growth stock. Here’s why I won’t

Eyebrows were raised when Warren Buffett's company invested in this Latin American fintech disruptor a few years ago. But now…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

£15k to spend? 3 UK shares, investment trusts and ETFs to consider for a £1,185 second income

By harnessing a range of different dividend stocks, I'm confident this mini portfolio might pay a large long-term second income.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Tesla stock about to crash?

Tesla stock was on the slide today, shedding around $80bn in market value. What's going on with the electric vehicle…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Should British investors consider buying Apple stock while it’s down 14% in 2025?

Apple stock has underperformed in 2025, falling more than 10%. Is this the buying opportunity UK investors have been waiting…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
US Stock

2 AI growth shares that I think are still undervalued

Jon Smith flags up two AI growth shares that aren't as overhyped as some peers, making them appealing for him…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Where is the next Nvidia stock right now?

Nvidia stock has delivered jaw-dropping gains. Here are 10 growth shares that have the potential to also produce big returns…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Could these FTSE 100 stocks explode in July?

Looking for FTSE stocks that could catch fire this month? Here are the share price prospects of two popular London…

Read more »