It is always a relief when you shoot down a stock that most analysts are hailing as a buy, and subsequent events prove you right.
I dumped my entire stake in mining giant BHP Billiton (LSE: BLT) (NYSE: BBL.US) one year ago, and the share price subsequently collapsed by 25%. That was the best investment call I made last year.
I also spent the first six months of 2014 disagreeing with the market consensus that Rio Tinto (LSE: RIO) (NYSE: RIO.US) was a buy. I wasn’t wrong to rubbish Rio, it is down 16% in 12 months.
Finally, the market is catching up with me, with Credit Suisse and Investec Securities, downgrading BHP Billiton a notch to ‘sell’ and ‘underperform’ respectively.
In A Hole
I still admire these two market dominant, well-managed businesses, I just thought that events were moving against them.
When China was guzzling iron ore and copper to feed its infrastructure and credit boom, BHP Billiton and Rio Tinto could only grow fat on the proceeds.
But as the country battles to control a property and credit bubble, while bursting at the seams with over-priced and under-tenanted tower blocks, the good times simply couldn’t last.
Dig Baby Dig
I also feared that all that talk about a commodity super-cycle had distorted investor attitudes and given them inflated expectations of how fast BHP Billiton and Rio Tinto could continue to grow.
Finally, I questioned their strategy of meeting falling prices by ramping up production to record highs.
Falling demand and rising supply could only means one thing in the short term, I decided, and bailed out.
Cash Is King
I think management at both companies have got their strategies broadly right by cutting capital expenditure and focusing on cash generation.
This has also helped keep investors happy: dividend hikes and share buybacks always go down well.
Untrammelled production might force metal prices even lower in the short term, but should also boost BHP and Rio’s market share in the longer run, by squeezing out smaller competitors with relatively higher costs.
At some point, I will look to move back into the stocks. But we haven’t reached that point yet.
China is still slowing. US growth expectations may have been inflated. The Federal Reserve may hike rates this year. Global growth is unsteady.
The time to buy BHP Billiton and Rio Tinto will one day be upon us, but we aren’t there yet.
