Why Glencore shares could be my smartest purchase of the year

Jon Smith explains why he feels some investors didn’t fully digest the 2023 results and overreacted about Glencore shares in the short term.

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A few weeks ago, Glencore (LSE:GLEN) shares hit 52-week lows at 365p. The stock has managed to rally slightly since then and is up a modest 3% over the past year. Yet when I consider several factors about both the company and the broader sector, I think it’s potentially be one of the smartest buys in the FTSE 100 for the year.

A short-term overreaction

The sharp drop last month came from what some perceived to be poor full-year results for 2023. A lot of the news headlines said that profits dropped by 50% versus 2022.

Although this is technically true, it’s important to remember that 2022 was a blockbuster year. It will go down in history as an exceptionally volatile year for oil, LNG, coal and other products. The supply chain and logistics problems also created a large market imbalance that Glencore was able to profit from.

Understanding that means the 2023 results weren’t as bad as some made them out to be. If I compare them against 2021 results, both revenue and operating profit were higher in 2023.

The bottom line here is that I believe the stock is cheap because of a negative overreaction to the numbers.

Fundamentally strong

Looking ahead to the rest of this year, I think Glencore is strongly placed to do well. For example, it has a low net debt to Adjusted EBITDA ratio of just 0.29 times. This compares the net debt to earnings, showing how easily the debt can be covered by current earnings.

Given that inflation both here in the UK and in the US is showing signs that it might be rising again, interest rates might have to stay higher for longer. This will hurt heavily debt-laden FTSE 100 stocks. Yet given the low debt for Glencore, this won’t be an issue.

Another factor in the firm’s favour is the commodities outlook for this year. Gold recently hit all-time highs. Crude oil is at the highest level since last October. Should these (and other) products continue to be in high demand, this should boost earnings for Glencore.

Pulling it together

When I put all of these points together, I think it’s a smart purchase to consider.

In fact, I bought some Glencore shares earlier this month. When I compare it to other FTSE 100 stocks, I think it looks attractive for potential share price gains in 2024.

In terms of risks, I’m not denying that they exist. I’d flag up the volatile nature of the stock. Given that part of the business performance is driven by commodity prices (outside of the business’s control), we can see erratic swings in the share price. This might put off some potential investors who would prefer a less volatile alternative.

Even with this being the case, I’m still optimistic going forward.

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.

Jon Smith owns Glencore Plc shares. 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.

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