Like a lot of FTSE 100 commodity stocks, the Glencore (LSE: GLEN) share price is typically volatile in the short run, and cyclical in the longer term.
Natural resources stocks tend to react strongly to day-to-day macro economic news, such as whether the Chinese data is up or down. They are also subject to ‘event shocks’, as a drop in the price of oil or copper, bad weather, or strikes may all impact prices or production.
Ups and downs
Commodity stocks like Glencore are also locked into the broader business cycle. They tend to perform better when the economy is booming but struggle in a recession, as this affects demand and prices for raw materials.
Investors who pick the right time to buy can do brilliantly. For example, the Glencore share price is up 171% measured over three years. It’s struggled lately, falling 6.55% over 12 months.
I prefer to purchase commodity stocks when they’re down rather than up. That way I avoid the risk of buying right at the top of the cycle, and give myself a shot at buying near the bottom.
With that in mind, I snapped up Glencore in July after a 10% dip, and bought more in early September following further weakness.
So far, I’m up 0.77% but these are early days. I’ll judge the success of my purchase over five years, not five weeks.
For Glencore to prove a profitable buy, we need an economic recovery. That may take time, which I’m happy to give.
Glencore’s first-half results, published on 8 October, showed how tough things are right now as earnings halved from $18.92bn to $9.39bn. However, much of that was due to a winding down of the previous year’s price surge, following Russia’s invasion of Ukraine.
Management pinned this on weak energy markets, rising inflation, tighter monetary conditions and limited global economic growth, which hit the price of metals such as copper, cobalt, nickel and zinc.
I’m giving it time
The energy market isn’t quite as weak as it was, pushing Brent crude above $90. Glencore’s oil business markets crude oil, refined products and natural gas, so that should help.
Inflation is falling, but this has yet to feed through to more relaxed monetary policy, while the global economy could still fall into recession.
Given all those headwinds, I’m not expecting Glencore shares to rebound at speed. Especially since nobody knows how far the Israel-Hamas conflict could spread.
So there is plenty of risk here, although I think that’s priced into today’s ultra-cheap valuation of just 3.96 times earnings. A good dividend always helps. Management paid a $1bn special dividend in August, and announced it will buy back another $1.2bn of its shares by February.
However, that’s notably less than in the same period of 2022, when investors were celebrating a $1.45bn special dividend and $3bn share buyback. Glencore’s shareholder returns can be volatile too, but the board is happy to share in its good fortune during the up cycle. The stock is forecast to yield 8.42% in 2023, dipping to 6.74% in 2024.
I’m happy to hold Glencore. I’d like to buy more while it’s still cheap. But for diversification’s sake, I might switch to Rio Tinto which also looks good value.
