Today I am looking at the share price prospects of two volatile commodity plays.
Digger in danger
Precious metals producers like Fresnillo (LSE: FRES) have been caught in a rare updraft in recent weeks, as gold and silver values have rattled higher.
Fresnillo itself has seen its share price gallop 40% higher in the last three weeks, the business clocking up a14% gain in the last seven days alone, visiting levels not seen for a year. Golds glorious return as a popular safe haven asset, combined with escalating weakness in the US dollar, has helped gold and silver miners charge in lockstep with commodity prices.
Last week gold struck its most expensive since early 2015, going above $1,260 per ounce, meaning the asset had gained $200 since the start of the year. But such has been the scale of the metals rise that many are fearing a severe correction indeed, prices were recently dealing back around $1,210 on Monday, as risk appetite flowed back into stock markets.
While macroeconomic jitters are unlikely to dissipate any time soon a troubling omen for global stock exchanges I believe gold values could come under increasing pressure as low inflation persists and fresh greenback gains could be in the offing. On top of this, Fresnillo could suffer from falling silver values as a cooling world economy saps demand from industrial users.
The City expects Fresnillo to record a stunning 81% earnings bounce in 2016, resulting in a huge P/E multiple of 30.7 times. Sure, gold and silver values may pick up further traction in the near-term, but I believe this high multiple leave the Mexico-focussed digger in danger of a huge share price correction should metal prices turn severely south.
Oil pumper under pressure
Fossil fuels driller BP (LSE: BP) endured a fresh jolt lower between last Monday and Friday as crude values slipped back towards the $30-per-barrel marker. Shares in the business lost 5% during the course of the week, and I believe further falls could be in the offing.
Oil prices received a slight uplift last week after Venezuelan energy minister Eulogio Del Pino told the Wall Street Journal that industry cartel OPEC was on a very good path to agreeing an output reduction.
I, for one, expect the group to keep flooding the market with excess material, however Iranian, Iraqi and Libyan output threatens to chug higher in the years and months ahead, while growing political discord between Saudi Arabia and Iran also undermines the prospect of a deal.
With OPEC pumping at record levels and global demand dragging, it seems unlikely that the revenues picture at BP will improve any time soon as already-bloated crude inventories grow. Indeed, the number crunchers expect the company to flatline in 2016, although I believe even this grim projection is in danger of downgrades as oil prices sink.
And with the company sporting a P/E rating of 14.6 times, I believe the business remains chronically overvalued given its poor growth prospects. A reading closer to the bargain benchmark of 10 times would be a fairer reflection of the substantial risk hurdles facing BP in the coming months and years, in my opinion.
But whether or not you share my cautious take on BP and Fresnillo, I strongly recommend you check out this special Fool report that identifies what I believe is one of the hottest London-quoted dividend stocks money can buy.
Our BRAND NEW A Top Income Share From The Motley Fool report looks at a hidden FTSE 250 star generating breakneck sales growth across the continent, and whose ambitious expansion plans should power dividends higher in the years ahead, according to the Fool’s crack team of analysts.
Click here to enjoy this exclusive ‘wealth report.’ It’s 100% free and comes with no obligation.