Three weeks ago, I wrote an article pointing out that, despite attractive-looking valuations, the share prices of the big diversified mining companies seemed locked in downtrend. The thrust of that scribbling was that investors might want to wait for a trend reversal before plunging into the shares of firms such as Rio Tinto (LSE: RIO) (NYSE: RIO. US), BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Anglo American (LSE: AAL), because the cyclicality of the mining sector can lead traditional valuation measures to deceive us.
The bottom could be in
Looking back now, my writing coincided with what looks like the tentative start of a trend reversal for some mining shares. Indeed, commodity prices such as those of copper, palladium and oil seem to be curling up, suggesting better fortunes may be ahead for the miners.
The kind of bottoming we see now, and early suggestions of a change in trend, on these firms share-price charts is just the crucial buy signal Ive been waiting for right now could end up being a good time to pitch into the big miners.
Mind you, Id still caution against buying and holding big mining firms with nary a second thought. The overarching characteristic of the mining sector is its joined-at-the hip affinity with macro-economic cycles and supply-and-demand equations. Boom and bust is the name of the gain for the miners, so forget about justifying any purchase with the magnitude of the dividend or by cosying into the warm reassurance of a cheap-looking valuation.
A broad-brush approach to commodity prices, via investing in gargantuan diversified miners, strikes me as having merit. After all, we get dividend income and operational progress on top of any commodity price rises. However, I reckon the best idea is to try to catch the up-leg of the next cyclical rise, and nothing more investing in the miners is a short-term occupation, unless, of course, we have a particular fondness for repeatedly passing go and pride ourselves on not getting dizzy with the roundabout motion!
Diversification
The great appeal of the mega-sized mining firms such as Rio Tinto, BHP Billiton and Anglo American is their diversification. All three firms seem well spread in terms of their geographical operations and end markets, although there are differences in the mix of resources they produce.
Heres a quick-check table to identify which products underpin an investment in each company. Ill leave you to research the weighting each commodity takes in the firms portfolios!
BHP Billiton |
Rio Tinto |
Anglo American |
|
Aluminium |
Yes |
Yes |
|
Coal |
Yes |
Yes |
Yes |
Copper |
Yes |
Yes |
Yes |
Diamonds |
Yes |
Yes |
|
Iron ore |
Yes |
Yes |
Yes |
Manganese |
Yes |
Yes |
|
Nickel |
Yes |
Yes |
|
Niobium |
Yes |
||
Oil |
Yes |
||
Phosphates |
Yes |
||
Platinum |
Yes |
||
Potash |
Yes |
||
Uranium |
Yes |
The big staples coal, copper and iron ore feature in the list for all three firms. After that, each firm has its own character depending on the particular blend of commodities it deals with.
Recent news
Rio Tinto released what it describes as robust production figures for the fourth quarter of last year, while Anglo American delivered something of a mixed bag on production. Meanwhile, BHP Billiton reckons its operational performance over the last six months was strong.
Buying shares of firms in beaten-down sectors, such as highly cyclical miners now, is one strategy to boost portfolio performance. Yet doing the legwork can be tough for time-strapped investors in full-time careers outside the markets. That’s why the Motley Fool offers a special wealth report that discusses Ten Steps To Making A Million In The Market.
This useful paper is available free of charge and without obligation for a short time longer. It sets out ten time-tested steps to help all investors profit consistently from the stock markets and signposts to some great opportunities available right now for the well-informed investor. You can download a copy by clicking here.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.