The Motley Fool

Should you prepare for bad news from BHP Billiton plc, Cairn Energy plc and Amec Foster Wheeler plc?

The resources sector may have experienced a respite in recent months, but it still faces an uncertain future. Of course, this has always been the case since commodity price falls can happen at any time and go on to hurt the profitability of resource-focused stocks. However, with investors being keenly aware of this fact following the difficulties over the past couple of years within the resources sector, investor sentiment may turn much faster than it otherwise would do if commodity prices come under pressure.

Clearly, BHP Billiton (LSE: BLT) is one of the better diversified resources companies on the FTSE 100. However, even its share price has been severely hurt by the downturn and if commodities as a whole endure a difficult period, BHP’s share price could reverse the gains of the last three months where it has risen by 38%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Looking ahead, BHP is forecast to increase its bottom line by 180% in the next financial year. And even after such strong share price growth of recent months, BHP’s improved financial performance does not appear to have been fully priced-in by the market. In fact, it trades on a price-to-earnings-growth (PEG) ratio of just 0.2 and this indicates that it has a relatively wide margin of safety. As such, and while a sustained fall in the price of commodities could cause its shares to fall, BHP still seems to offer a very enticing risk/reward ratio.

Worth buying?

Similarly Amec Foster Wheeler (LSE: AMFW) appears to be worth buying despite the risk from continued lows in commodity prices that have hurt investment activity in the sector. In response to the difficult trading conditions, Amec Foster Wheeler has initiated the sale process for multiple non-core assets and while its order book declined in value by 3% during the first quarter of the year, the company is still forecast to increase its bottom line by 4% next year. This could help to improve investor sentiment and show that even during challenging trading conditions, Amec Foster Wheeler is able to respond positively.

With Amec Foster Wheeler trading on a price-to-earnings (P/E) ratio of just 9.4, there’s significant upward rerating potential on offer. And with its shares yielding 4.4% from a dividend that’s covered 2.4 times by profit, it seems to be a sound buy.

Huge potential

Meanwhile, Cairn Energy (LSE: CNE) is a resources stock with huge potential to deliver long-term profitability. Its asset base is highly enticing and with it having a large cash pile, it appears to be well-funded. During a period where investor sentiment is rather low, Cairn’s strong balance sheet is a major plus for the company and its investors.

As with BHP and Amec Foster Wheeler, a sustained fall in the price of commodity prices could hit Cairn’s share price very hard. And the problem it faces is that because investors are somewhat nervous regarding the outlook for the resources sector, they may seek out companies perceived to be less risky than Cairn. In other words, businesses that are profitable and trade on low valuations. As such, and while Cairn could be a worthy buy for the long term, there seem to be better options elsewhere within the resources space.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Peter Stephens owns shares of BHP Billiton. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.