November is turning out to be a good month for the FTSE 100 index. It touched levels higher than 7,300 recently, and continues to hover around that number as I write. Rising stock markets increase the chances of my investment portfolio growing in value. But they also increase prices of individual stocks on my wishlist, sometimes to uncomfortably high levels.
It turns out, though, that if I look hard enough, I can still find some pretty sweet FTSE 100 bargains. Specifically, I would look at commodity stocks. Now, these stocks have had a good ride over the past year or so. Industrial metal prices rallied, which pushed up their share prices and also made investors big money in dividends.
Beaten down commodity stocks
Some of them continue to rally, like the Swiss commodity miner and marketer Glencore. Others have taken quite a hit, even though it may not be immediately obvious. One such is Anglo American (LSE: AAL), whose share price is still up around 35% over the past year. But this hides the fact that in the last six months alone, its share price has fallen around 19%. And then there are those for whom the party seems to be entirely over. I am referring to Rio Tinto (LSE: RIO). All of its share price gains of the past year have now been wiped out.
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Unsurprisingly, this makes their relative prices dirt-cheap. Anglo American has a price-to-earnings (P/E) ratio of around 7 times right now, while it is at about 5 times for Rio Tinto. By comparison, the P/E for Glencore is close to 33 times. This has also increased their dividend yields. While Anglo American is at a pretty good 6.4%, Rio Tinto is at a huge 11.2%.
Why are these FTSE 100 stocks’ prices falling?
The big reason for their share price weakness is that the outlook for iron ore has undergone a correction. Both companies are among the top five producers of iron ore in the world. The list also includes the FTSE 100 stock BHP, but I am ignoring that for now because it is due to be delisted from the London Stock Exchange soon.
The commodity is also their biggest source of earnings. For Rio Tinto, it accounts for almost 75% of its earnings. Anglo American is a bit more diversified, but iron ore still makes up 41% of its earnings. The difference in reliance on iron ore possibly also explains why the former’s share price has fallen far more.
My assessment
I am of the view that their share prices could have over-corrected. Rio Tinto, for instance, has fallen below even its pre-pandemic levels. And at the same time, the outlook for the global economy continues to be robust. I reckon the Chinese government could still continue to support the recovery if the country’s economy does not pick-up sustainably and Joe Biden’s US infrastructure plan could also increase industrial metals’ demand.
Over time, I think these stocks will offer capital gains, not just high dividend yields. I hold both in my portfolio and will continue to do so.
