What You Were Buying Last Week: Rio Tinto plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

A solid performance

Rio Tinto (LSE: RIO) (NYSE: RIO.US) has performed disappointingly so far in 2013. Whilst the FSTE 100 is almost 9% up, Rio’s share price is down close to 22%. In fact, Rio’s share price has performed pretty badly for some considerable time — it’s fallen 33% over the past couple of years, and is 43% lower than five years ago. That’s hardly an inspiring track record for a potential investment. So what might have persuaded people to put Rio in the number 6 spot in the latest “Top Ten Buys” list*?

Well, at least one reason for its more recent failings is now behind it — the $14bn of write-downs that ended Tom Albanese’s three decades at the company, and which contributed to the first drop in Rio’s profits in almost twenty years. Albanese’s replacement as CEO, Sam Walsh, has been busy slashing costs and disposing of non-core parts of the business, with the aim of streamlining Rio into a more efficient, more focussed and more profitable enterprise.

And there’s early evidence that his efforts are working — in a review statement issued in April, first quarter operations were described as being “a solid performance”, with the company “making good progress” in achieving its cost reduction targets and other priorities for 2013. And global iron ore production (which contributes around three-quarters of Rio’s earnings) just hit a record first-half level.

There’s also the fact that Rio’s poor performance is as much the result of the cyclicality of the commodities industry as any fundamental shortcomings on Rio’s part (gigantic write-down notwithstanding). Macroeconomic factors have hit mining companies hard — not least the recent slowing of growth in China, the second biggest economy in the world, which has resulted in a significant fall in demand for what they dig up.

Current buyers will be hoping that an upturn is in sight, which should fuel a significant recovery in Rio’s fortunes.  They’ll be reassured by the fact that many major investment houses — such as Citigroup, Deutsche Bank, Investec, Credit Suisse and JP Morgan Cazenove — are all currently very positive about Rio. Indeed, Deutsche Bank’s target price is £44.90, which would mean a 55% increase on Rio’s current share price. At their current depressed level, shares in Rio could prove to be a profitable purchase.

And there’s always the dividend, which currently stands at about 4.4%, well above the FTSE 100 average. True, it doesn’t get close to compensating for the fall in share price over the past few years.  But investing is a ‘long game’, and the solid dividend provides shareholders with a nice comfort-blanket whilst they wait for better times. 

But of course, no matter what other people were doing last week, only you can decide if Rio really is a ‘buy’ right now.

A high-quality growth share

If you’re looking for a high-quality share with great potential, you’ll definitely want to know which company The Fool’s expert analysts have picked to feature in The Motley Fool’s Top Growth Share For 2013 report.

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> Jon own shares in Rio Tinto.

* based on aggregate data from The Motley Fool ShareDealing Service.