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Why Sirius Minerals plc is a growth bargain I’d buy and hold for 25 years

The time horizon of investors varies significantly. However, one thing which many appear to share is an impatience to generate profit from their investments. This is understandable, since it can be hugely frustrating when a stock price fails to rise as much as had been expected at the outset. Worse still, a falling share price and paper losses can lead to even more disappointment.

However, patience in underperforming shares can be significantly rewarded in the long run. One stock which could be a prime example of this is Sirius Minerals (LSE: SXX). The mining company has disappointed in recent months and is down almost 10% in the last six months. However, in the long run the company could deliver high returns.

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Slow and steady progress

This year has seen Sirius Minerals make rather ‘slow and steady’ progress. Its operations have moved forward as anticipated, with the company’s Woodsmith Mine developing as expected. There have been offtake agreements signed as the business builds up its marketing capabilities ahead of first production in just under four years’ time. And with crop studies showing that the company’s polyhalite fertiliser could potentially perform better than other options, the Sirius outlook has remained positive throughout the year.

Risks

However, market sentiment has been downbeat of late and it seems that some investors are still unsure about the level of risk the company faces. For example, the project is still in its early days, and there are various risks which could lead to higher costs and/or delays to the first production start date. Furthermore, there is a lack of certainty on the company’s future success at marketing the product, nor is there complete clarity on pricing.

Returns

Despite these risks, Sirius Minerals seems to have high return potential. Further offtake agreements could be signed over the next few years which could help to build investor confidence in its outlook. Progress on further financing initiatives may also help to generate improving investor sentiment. And if the company’s project can remain on track, its forecasts for production volumes and profitability in future years may seem to be more realistic. This could lead to a higher share price in the long run, which is why the company could be worth holding for a sustained period of time.

Overvalued

While Sirius Minerals may look cheap after its recent share price fall, one stock which appears to be expensive is Spirax-Sarco (LSE: SPX). The industrial engineering company reported on Tuesday that the global macro-economic environment remains positive and that its sales growth in the four months to October increased modestly compared to the first half of the year. It expects industrial production growth rates to remain positive for the rest of the year and is on track to meet guidance for the full year.

Clearly, the update from Spirax-Sarco is generally positive. However, the company’s valuation suggests that it may be a stock to avoid at the present time. It is forecast to post a rise in its bottom line of 12% next year, but due to a price-to-earnings (P/E) ratio of 27 it seems to be relatively overpriced right now. As such, there may be better value elsewhere for long-term, patient investors.

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Peter Stephens owns shares in Sirius Minerals. 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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