Since the beginning of the year, the Glencore (LSE: GLEN) share price has dropped more than 29%. After this decline, the stock looks cheap compared to its historical pricing.
However, like so many other businesses, Glencore has been severely impacted by the coronavirus crisis. The company is facing several other significant headwinds as well.
Glencore share price concerns
Glencore is the world’s biggest commodities trader. It shifts millions of tonnes of metals, minerals and oil across the globe. This gives the company a relatively defensive nature.
The world will always need commodities like oil and copper, and Glencore has the size and contacts required to procure and ship these resources at the lowest possible costs.
But the business also operates in some grey legal areas, and the lawsuits are mounting up. The latest is a criminal investigation into the company over its failure to prevent alleged corruption in the Democratic Republic of Congo, where it mines copper and cobalt. The group is also being investigated by the Serious Fraud Office over “suspicions of bribery” in December 2019
These legal actions have had a meaningful negative impact on the Glencore share price. It doesn’t look as if these investigations will be resolved anytime soon either.
If it is found guilty in any of these investigations, the company’s ability to do business in certain countries may be restricted. That could have an impact on profitability, which would lead to further selling of the Glencore share price.
Still, even if the company is found guilty, the size of its operations should insulate it from the worst of the fallout. There are few, if any, other companies that have access to their same kind of trading infrastructure as Glencore.
As such, now may be a good time for risk-tolerant investors to snap a share of this business at a low price. The company’s earnings might drop substantially this year, but they should recover in 2021, according to analysts. This depends on the global economic recovery.
However, policymakers around the world are planning large infrastructure spending plans to get the global economy moving again after the coronavirus crisis. The Glencore share price could benefit significantly from these actions as the demand for its commodities increases.
Also, the company has historically returned a significant amount of profits to investors with dividends or share buybacks. This may continue when the crisis is over. Management still owns a large percentage of the group’s outstanding shares. Shareholders should benefit from this in the long run.
If you like the look of the Glencore share price but are worried about the company’s legal problems, it may be best to own the stock as part of a well-diversified portfolio. Doing so may enable you to benefit from any upside while minimising downside risk.
The post Tempted by the Glencore share price? Here’s what I think you need to know appeared first on The Motley Fool UK.
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Rupert Hargreaves 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 2020