The rapid growth from developing nations like China and India have helped to significantly boost the demand for resources like iron and copper, and as such we’ve seen solid increases in volumes and prices in metals over the past 5 years.
Needless to say, this has been great news for mining stocks and we’ve seen some great success stories. Australia’s Fortesque Metals was trading at around 1c in 2003 and hit a high of over $13 earlier this year; that’s a gain of 130000%!!! But even the bigger stocks such as BHP Billiton have done well, with stock climbing from $9 to a high of $50.
The real question of course is can we expect these kinds of gains to continue? In recent months we have seen metals prices plummet, partly because we have seen demand drop due to the global economic slowdown, and also due to the fact that the US dollar has seen somewhat of a resurgence.
Do we treat this as a short term pull back or a major turning point? The world’s biggest miner BHP this week delivered another record profit result, and while that was essentially as expected, what was interesting was that the group seemed fairly optimistic about the future. BHP said that they expected the slowdown in developing nations to be minimal and short lived, and that while metals prices were expected to be volatile, they should remain very strong on average.
If we put any stock in these comments, it means that we are in a position to find some real value in the sector. BHP itself has seen its shares lose a quarter of their value over the past 3 months, and is now trading with a PE ratio of approximately 12. What’s even more exciting is that the current PEG ratio is just 0.4.
For those that are unfamiliar with the PEG ratio, it is derived by dividing the PE by the forecast growth rate. A reading of 1 represents fair value, a reading over 1 represents a stock that is overpriced and anything under 1 is considered to be undervalued. Take it from me, it’s not often you see a big blue chip stock trading with such a low PEG. Especially one that has just revealed a record multibillion dollar result for the 7th year in a row, and has forecast continued earnings strength. To further put things in perspective, compare it with the average of the Aussie market, which is currently over 1.3.
The situation is similar for many resource stocks, so I’m not just trying to spruce the big Australian. My point is that although commodity prices have come off their highs and have been rather volatile in recent months, the long term outlook remains very attractive. The significant pull back we have seen in the resource sector is providing us with a great opportunity to get back into the sector, and it’s a situation that’s not likely to last.
Go long, stay strong!