Political uncertainty throughout the world has been hammering businesses margins –and therefore stock prices — most of the year.
But some stock prices hold steady even during economic uncertainty. In my value investing head, I categorise these stocks as ‘buy at any reasonable price’. Of course, I’m not one to part with my money for something that is horrendously overvalued. But if the business is sound, and run by good people, then I think it’s logical that its profit and share price will continue to grow.
Of course, what excites us value investors even more than buying these steady businesses, is the thought of finding a gem that is undervalued. Is this company one of them?
Over the last year, the Glencore (LSE: GLEN) share price is down approximately 20%, resulting in a price-to-earnings ratio of just 10, although the share price is seeing a little bit of a rebound of late, possibly due to the cyclical nature of mining stocks.
If you don’t know much about Glencore, don’t worry, you’re not alone. It’s a bit of a hidden giant in the FTSE100. It’s a global mining and commodity trader, which was formed after a merger between Xstrata and Glencore International in 2013.
I’ve written in the past about my reservations regarding buying mining stocks. They can be wildly unpredictable beasts. It takes vast amounts of capital to install the infrastructure to get the operation working, and that’s all before the company even generates cash-flow. Look at a business like Sirius Minerals, which is having trouble accessing funding, and you can see the potential problems.
Why is Glencore any different? For a start, it is an established business with a market cap of £30bn.
Geopolitical tensions and uncertainties have undoubtedly weighed down its valuation of late. In particular, the US-China trade war has unsettled investors, who fear that this may impact China’s appetite for commodities.
Of course, there is a real risk for Glencore from trade tensions. These challenging times were noted in the business’s half-yearly results, which explains the 32% drop in adjusted EBITDA.
Yet the company remains optimistic and believes that commodity fundamentals will move in its favour, and that its diverse commodity portfolio will continue to play a key role in global growth.
For many investors, the prospective dividend yield of 6.5% will leap out at them. CEO Ivan Glasenberg has also put his money where his mouth is, upping his stake in the company from 8.31% to 9% on October 9.
Sometimes global economic uncertainties such as these trade tensions suppress the share price of good companies, offering a buying opportunity for value investors.
Do I think that this is the case with Glencore?
In my mind, buying shares in this company carries a lot of risk. But if I had some money burning a hole in my pocket, I think this could end up being a good buy for an investor with a long-term horizon, if only for the dividend alone.
- 3 reasons I’d ditch buy-to-let property and buy FTSE 100 shares right now
- Could this looming threat destroy RBS and every other FTSE 100 bank?
- 2 reasons why I would buy Lloyds for my ISA at the current share price
- Hargreaves Lansdown shares are down due to the Neil Woodford saga. What’s the best move now?
- Stop saving, start buying dividend stocks: a simple plan to retire early
- Top shares for 2019
T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2019