UK Edition
The stock market does not offer a smooth path to high returns. Over time, shareholders inevitably face a myriad of disappointments that can test their patience and emotions. Today’s economic uncertainty is yet another example of such a challenge that, while painful due to the paper losses it has prompted, is not a reason to cut and run.
In Questor’s view, the inherent ups-and-downs of the stock market should not dissuade any investor from holding shares. After all, equities offer long-term returns that easily trump other mainstream asset classes. FTSE 100 mining firm Glencore, for example, has generated a 75pc capital return and outperformed the index by a similar amount since this column advised readers to buy it in July 2017.
Since then, the firm has experienced a wide range of problems that have had a negative impact on its performance. They include, but are not limited to, legal issues, economic challenges and geopolitical uncertainty that have hurt its production, and profitability, at times over recent years.
The company now faces the prospect of weaker demand caused by a seemingly inevitable economic slowdown. It also recently reduced full-year production guidance for some commodities following extreme weather, industrial action and supply chain issues at some of its locations. However, in Questor’s view, it continues to offer significant long-term total return potential.
Despite its vast outperformance of the FTSE 100 over recent years, the stock still trades on an exceptionally low valuation. Its forward price-to-earnings ratio, for example, is less than five. This shows that investors have more than adequately factored in a period of potentially reduced profitability.
It also suggests that the company’s $3bn share buyback programme, which could last until February, is perfectly timed. It was announced alongside a $1.45bn special dividend for the first half of the year that means investors in Glencore have received around 30p per share in dividends over the past year.
This equates to a dividend yield of 5.5pc at its current share price that, while less stable than the majority of income stocks, nevertheless evidences its long-term income investing potential.
The firm’s interim results also highlighted its improving financial position. Net debt fell by 11pc in the first half of the year as high commodity prices provided a boost to the company’s cash flow. This means that Glencore now has a net debt-to-equity ratio of 63pc, which puts it in an increasingly strong position in a new era of higher interest rates.
It is also well placed to benefit from a likely continued relaxation of China’s zero-Covid policy that has the potential to stimulate global economic growth over the medium term. Indeed, there is no guarantee that the world’s current economic slowdown will prove to be as long lasting or severe as many downbeat forecasts currently imply.
Over the long run, its shift to future-facing commodities is set to be a key catalyst for profit and share price growth.
Demand for nickel, cobalt and copper, which are used in electric vehicles and renewable energy infrastructure, could rise at a much faster pace than their supply growth as the world implements its net zero agenda.
And while rapidly rising interest rates and heightened economic uncertainty could lead to a slower pace of transition to cleaner forms of energy and transport over the short run, steadfast environmental concerns among governments, businesses and consumers are likely to cause structural growth opportunities for mining firms over the coming years.
Undoubtedly, such opportunities will be interspersed with challenges that cause periods of weaker profitability. In Questor’s view, such events are an inherent part of investing in the stock market. In return, investors can generate exceptional gains on their capital that mean the reward is well worth the risk.
Glencore arguably faces greater challenges than many other FTSE 100 firms over the short term due to its dependence on a global economy that has an uncertain future. However, its solid balance sheet, cheap share price and long-term growth potential mean it offers a favourable risk/reward opportunity.
Questor says: buy
Ticker: GLEN
Share price at close: 531.1p
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