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1 FTSE 100 stock and 1 mid-cap I’d buy right now

Gold and silver miner Fresnillo (LSE: FRES) has been a frustrating stock for investors in recent years. Indeed, with its share price having more than halved from three summers ago, it ranks second only to British Gas owner Centrica as the FTSE 100‘s worst performer over the period.

Meanwhile, FTSE 250 utility Drax (LSE: DRX), which released its half-year results today, hasn’t done a great deal better. Its share price is down around 20% over the three years.

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However, I think both Fresnillo and Drax have the potential to deliver strong returns for investors buying at today’s depressed share prices.

Power play

When Drax posted its 2018 results in February, and commented on the outlook for 2019, it said: “We are confident in our ability to continue growing our earnings and advancing our strategy through the year.”

Today, the company reported strong growth in the first six months, with adjusted earnings before interest, tax, depreciation and amortisation up 35% to £138m. Of this, £36m came from pumped storage, hydro and gas-fired generation assets acquired from Scottish Power for £700m at the start of the year. Management said: “Integration is progressing well and we have been pleased with the performance of these assets.”

The shares are up around 3% on the day at 295p, as I’m writing. City analysts’ earnings forecasts for the full year put the stock on a price-to-earnings (P/E) ratio of 11.3. Meanwhile, having hiked the interim dividend 12.5% today, the board said investors can look forward to the same uplift in the full-year payout. This gives the stock a yield of 5.4%.

Already one of the leading generators of flexible, low carbon and renewable electricity in the UK, Drax says it has attractive investment options for growth on the back of the UK’s target of achieving net zero carbon emissions by 2050. I think the modest P/E and generous dividend yield have huge appeal. This is a stock I’d be happy to buy and hold for the long term.

Silver lining long term

Gold and silver prices have a big impact on the revenues and profits of companies that mine the metals. However, operational performance is also key for miners. And on this front, Fresnillo disappointed in 2018. Lower ore grades than expected and operational issues saw the company reduce its silver production guidance through the year.

I was hopeful Fresnillo would put its problems behind it in 2019. However, a Q1 update in April revealed production “slightly weaker than anticipated,” and this was followed by a Q2 update last week in which the company reduced its previous full-year guidance.

Silver production is now expected to be 55-58m ounces (previously 58-61m), mainly due to “lower-than-expected ore grades and ore throughput at the Fresnillo mine.” Gold production guidance has been decreased to 880-910k ounces from 910-930k, mainly due to “a delay in the construction of a leaching pad at Herradura and the lower ore throughput at the dynamic leaching plant.”

I can understand investors’ frustrations, but I think this is the wrong time to give up on Fresnillo. Indeed, I reckon the depressed share price represents an opportunity to buy into the world’s biggest silver producer for the long term. City analysts expect earnings and dividends to fall over 30% this year, but bounce back over 40% in 2020, giving a P/E of 21.9 and a 2.4% yield at a current share price of 773p.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. 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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