Keep Calm, Carry on and Buy Glencore

3 mins. to read
Keep Calm, Carry on and Buy Glencore

With the dramatic Glencoe massacre of Chinese equities as a background and after its 44% fall in share price, I am having a look at Glencore as a stock for buying. Share prices don’t usually go down for ever – though it sometimes feels like it – and in the case of Glencore there is a handsome estimated recovery in earnings next year, along with a useful estimated prospective dividend yield of 5.9%.

Naturally, I try to keep calm and carry on just as my mother did in the War. I also have the mug. It’s just when things seem particularly gloomy on a Monday after a wet July, Sunday that you need to keep a sense of balance and retain sufficient confidence to look around for value. When the tides of markets go out they reveal both overpriced and underpriced equity. Here I am on a gloomy Monday with the Chinese equity market going through the floor; about as cheerful a fate as sitting in the Tea Room of an old Midlands British Rail station with a curled up cheese sandwich and a strong cup of tea. Naturally, I greatly look forward to such ground hog day nostalgia when that cheery Mr. Corbyn gets into office and the rule of “one out all out” returns to the land.

The sight of the Chinese market in full disorderly retreat is not a classic indicator of weak markets to come in the UK, US, Japan or elsewhere. They have never had that relationship. However, it is clearly telling us something. I prefer as my bear signal those times when good domestic and US results, above market expectations prompt selling, not buying. That in my experience is a classic sign of weak markets to come and we seem to have seen something like that with the recent Apple results. Personally, I am not sure what to make of the China collapse! Clearly, geared up, account buying Chinese punters have lost confidence.

But does that imply big economic consequences? It is not yet a consumer economy and I assume its equity markets are not yet a store of wealth and deferred consumer spending, at least not on the scale of the US and elsewhere. The most recent economic indicators for the UK and US look encouraging and I note that the FTSE100 is selling on a trailing PER of 14.6 and an average dividend yield of 3.65%, covered 1.88 times by equity earnings. Moreover, the gold price is not indicating a collapse of confidence in the world monetary system. Consequently, I assume that the thin equity markets of summer are merely taking a healthy breather, and not indicating future significant weakness.

Mining stocks are worth looking at. I reviewed Rio Tinto (RIO) last month – for the last year my favourite share in the sector because of its economic and financial efficiency and its cash flow which underwrites dividend growth prospects.

Rio has been the relative champion of the FTSE 100 mining sector over the last year. So I have decided to have a glance at Glencore (GLEN), the mining company that mounted an ill-fated bid for RTZ last year in order to gather in the fruits of its sound investment policy. Glencore’s management has more of a trading ethos than an investment and production mindset. However, that did not prevent Glencore from underperforming Rio by 14% last year when its share price fell 44%. Everyone expects Glencore to do some corporate consolidation whilst the sector is at low prices. Not having a handle on what that might be, I have decided to look at Glencore itself, as the longer term beneficiary of any such corporate action. That seems sensible to me! I note that it appears to be on a five year trend support. The consensus of market estimates reveals a bullish expectation for next year with a massive 53% increase in earnings to 18.4p per share and a small increase in dividend payout to 12.3p a share, which values Glencore shares at 207p on an estimated price to earnings ratio of 11.5 times; a PEG of 0.2 and an estimated forecast dividend yield of 5.9%.

There is precious little good news around, so this sounds like just the moment to be thinking about buying such shares on such attractive consensus estimates and a technically encouraging share price chart.

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