Why I’d Buy Glencore PLC, But Would Avoid Xcite Energy Limited

While there are many different styles of investing, ultimately obtaining a balance between income, growth and value is usually the most appealing path to take. That’s because, while stocks with super growth prospects or incredibly high yields are attractive, they inevitably appeal to a relatively small pool of investors. Meanwhile, stocks that offer both of these qualities at a reasonable price could see their share prices bid up by demand from a wider spectrum of investors, thereby providing greater total returns over the longer term.

A Balanced Approach

One company that does appear to offer a very balanced investment case is Glencore (LSE: GLEN) (NASDAQOTH: GLNCY.US). Certainly, it has not been a top performer in the past, with its share price having fallen by a whopping 47% since it listed in May 2011. However, looking ahead, Glencore could offer a very high level of total returns due to its potent mix of growth, income and value.

For example, Glencore’s share price fall has meant that its income prospects are much, much brighter. In fact, it now yields a very impressive 4.2%, which is higher than the FTSE 100’s yield of around 3.5%. And, looking ahead, Glencore could increase dividend payments at a brisk pace, since it is expected to pay out just 55% of dividends as a profit next year which, when compared to a number of its major mining sector peers, is relatively low.

Furthermore, Glencore also offers superb growth prospects. Certainly, its bottom line is likely to be very volatile and current guidance is unlikely to be static over the next couple of years, but even so Glencore’s profitability is due to rise by 13% this year, and by a further 48% next year. That’s a staggering rate of growth – especially among resources companies – and it shows that Glencore, after three hugely challenging years that have seen net profit decline, appears to be an excellent turnaround story.

Despite such impressive income and growth potential, Glencore trades on a price to earnings growth (PEG) ratio of only 0.3. This indicates that its shares could go much higher and, even though investor sentiment remains weak, the company’s long term future as an investment remains sound.

A Riskier Approach

While Glencore offers balance and multiple possible catalysts, exploration company, Xcite Energy (LSE: XEL), is much more risky. That’s because, while it has a relatively impressive asset base, there remain question marks among a number of investors regarding its long term financing. In fact, if the oil price weakens in future, Xcite could find it more difficult to spark investor interest in its planned activities in the coming years – especially since it is loss-making and is expected to remain so over the medium term.

Certainly, Xcite Energy is cheap and this is best evidenced by its price to book ratio of just 0.5. However, with a number of other resources plays offering great value as well as very robust finances, improving profitability and even impressive dividend potential, Xcite appears to lack appeal on a relative basis. As such, and while it could reverse the 48% fall in its share price over the last year in the long run, I’d rather choose a less risky and potentially very rewarding stock like Glencore.  

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.