Quote:
Originally Posted by Tomkat
Why is the mining sector such a good investment right now? I don't understand that  |
Mining stocks have dropped around 30-60% in the last few months. They are massively off their highs and their P/E ratios (
http://en.wikipedia.org/wiki/PE_ratio) are around 6-7 for the bigger companies I named.
They are not very good short term bets as commodity prices are still falling and global growth is slowing more than expected. One thing you have to realise about stocks is that things get priced in.
Think about it like this. A trader will predict that the next six or 12 months will be bad (for the company - remember a companys value is determined by estimated future profit/assets/dividend) and will sell stocks in anticipation of this. Therefore if things continue to fall over the next 6-12 months as expected the price should remain (in theory) quite static. If in 6-12 months it is shown that things are worse than expected the price will fall further. If things are better, the price will rise. This is oversimplified but take that understanding in theory.
If we apply the same logic to mining stocks, the theory is that mining stocks have been sold quite heavily and have priced in a slow down in global growth. Therefore even if we expect that the world gdp will slow massively from last year, the equity prices might not drop that much further.
Further we know that although demand for commodities (metals) will decrease, the demand will not fall completely. There is still a lot of growth potential out there in countries like China, India etc. Once commodity prices drop to a certain level, they will bounce back (countries tend to stockpile commodities and use their surplus closer to depletion - also mining companies will produce less).
Anyway the point is that in 2-3 years things will start to bounce back. As i said before traders tend to predict future growth and therefore traders will buy back mining stocks in anticipation for future growth. In this scenario that means that mining stocks will be much much higher in 5 years (remember we're investing for the long term) than they are now. At most I think mining stocks might drop a little bit further, but they are beginning to look massively oversold now. I can't say that I can predict where the lows for mining stock are. They might be around this point or just around the corner, but we are close. Some like VED are starting to approach their NAV. That makes no sense whatsoever.
Hope that explains.