During every investor’s career, there are golden opportunities which come along. At the time, though, such opportunities can be disguised as rather unappealing investments, since the outlook for either the company, its sector or the wider index is relatively poor. For example, during the credit crunch, the banking sector provided scope for staggering returns over the medium to long term, but there was a huge amount of fear surrounding its short term survival in the face of severe economic headwinds.
It’s a similar story today with the resources sector. The outlook is very downbeat since the prices of a whole host of commodities have fallen, demand has come under pressure as the Chinese economic growth story has become less appealing, and investor sentiment has declined. These factors have sent the share prices of a wide range of oil and gas, mining and resources support services companies tumbling.
This, though, has caused the risk/reward opportunity to swing increasingly in the investor’s favour. Certainly, the risk remains high: profitability is very likely to come under further pressure and, over the short to medium term, additional share price falls are a very realistic threat. However, the valuations of a number of companies now offer huge appeal and, as such, it could be worth buying a slice of them for the long haul.
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For example, Amec Foster Wheeler (LSE: AMFW) posted a fall in its net profit of 8% last year and is expected to see a further decline in its earnings of 15% in the current year. As such, its share price has tumbled by 25% over the last year. However, looking ahead to next year, it is expected to deliver a rise in its bottom line of 3%, which has the potential to shift investor sentiment and push the company’s share price upwards.
Furthermore, Amec Foster Wheeler has a price to earnings (P/E) ratio of only 10.8, which indicates that there is vast scope for an upward rerating. And, with its shares having a yield of 5.7%, in the meantime it offers an excellent cash flow stream for its investors, too.
Similarly, Premier Oil (LSE: PMO) fell into loss-making territory last year after major writedowns to its asset base hurt its bottom line. And, in the current year, it is due to make another loss, which is a clear reason why its share price has slumped by 55% since the turn of the year.
Looking ahead, though, Premier Oil is expected to return to profitability next year, which has the potential to positively shift investor sentiment in the stock. Certainly, further asset write downs are very realistic and the company does have a disadvantage versus a number of its oil producer peers since it operates out of the North Sea, where costs are typically higher than in other locations. However, with a price to book value (P/B) ratio of just 0.3, there is huge upside potential.
Meanwhile, Glencore (LSE: GLEN) has been massively out of favour this year, with its shares sinking by 60% year-to-date. And, with the market being somewhat nervous regarding its financial standing, Glencore now trades on a price to earnings growth (PEG) ratio of just 0.5 and has a valuation that is considerably below book value. In fact, with Glencore trading on a P/B ratio of just 0.55 using its half-year net asset value, it appears to offer a relatively wide margin of safety.
Certainly, the company’s debt levels have been a cause for concern for many investors, but its recent placing appears to have settled the market’s nerves somewhat. As such, and while it will likely remain a volatile stock, Glencore could be worth buying for the long haul.
