According to one popular share research website I use, a super stock is one showing strong indicators for value, quality and momentum. And FTSE 100 mining giant Anglo American (LSE: AAL) is right up there, ticking all the boxes. But I won’t be buying the firm’s shares anytime soon.
Great stock performance
The company has been growing its earnings for the past four years, which reflects in the strong move up in the share price since its nadir in January 2016. At the current 2,190p, shareholders have enjoyed a more than 780% rise since then. Such are the joys of catching the up-leg with a cyclical stock. But if I’d been holding Anglo American, I’d be reluctant to push my luck by clinging on now.
Indeed, out-and-out cyclical enterprises, such as the big mining companies, can reverse direction at short notice. Much of the trading outcome is outside the directors’ control and profits rely on the prevailing prices of the commodities they deal with. In the case of AAL, that’s diamonds, copper, platinum group metals, iron ore, coal, nickel and manganese.
Meanwhile, today’s production report for the second quarter ended 30 June reveals that in the first six months of the year, production generally declined compared to the equivalent period a year earlier. Diamond production fell 11%, iron ore by 11%, metallurgical coal 7%, thermal coal 5%, palladium 4%, manganese 3% and platinum 1%. The only commodities that AAL increased the production of slightly were nickel, up by 1%, and copper by 2%.
City analysts following the firm expect earnings to decline by a high single-digit percentage in 2020. I think that’s a cause for concern. It’s hard to imagine the share price continuing its ascent in the face of falling earnings. And who knows whether or not the falling trend in earnings will gain traction? It will, at some point, because, as sure as night follows day, smaller earnings follow large earnings. Earnings move in cycles. That’s why we call cyclical companies cyclical.
When will the next plunge arrive?
And it’s not just earnings that tend to move up and down, so do share prices and dividend payments. Yet it’s notoriously difficult to predict when cycles will turn. But after a long period of high profits, as we’ve seen with AAL over the past few years, for me it’s safer to avoid the stock altogether, despite its attractive-looking metrics.
Instead, I’d rather invest in an FTSE 100 tracker fund right now, which would be capable of ironing out some of the volatility we see in individual stocks such as AAL. Instant diversification across several sectors and 100 or so different underlying companies is attractive to me. I’m not saying I’d never invest in AAL ever again, I just wouldn’t right now.
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Kevin Godbold has no position in any share mentioned. 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.