A Sector I Really Should Buy

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LONDON -- It's strange the way sectors go in cycles. There's an element of cyclical business in many sectors, but investors know that. So, surely, if all investors had eyes for the long term, they'd factor in the cycles and share prices would not fly upward in the short term during the inevitable up spells and crash back during the equally inevitable down spells.

But as we know, most institutional investors only have year-end results in mind, and that leads to cycles in the share prices, too -- and long-term Fools can benefit from that.

In fact, Motley Fool analysts have been poring over the various sectors of the FTSE to identify the most undervalued prospects right now, and have come up with their "Top Sectors Of 2012" report -- it's free for a limited time, delivered to your email inbox.


Commodities are unwanted
Today, I'm taking a look at one of those sectors myself, as anything connected with commodities and mining seems to be badly out of favor right now. And that sentiment has pushed our big FTSE 100 miners down to bargain prices.

Just take a look at this table of the big five, showing two-year highest and lowest closing prices, with today's price, and forward price-to-earnings (P/E) ratios based on current consensus forecasts.

Company

Market Cap (in pounds)

High

Low

Today

P/E 2012

P/E 2013

Anglo American (ISE: AAL.L) 29bn3,422p1,956p2,069p7.66.7
Antofagasta (ISE: ANTO.L) 11bn1,634p909p1,097p119.8
BHP Billiton (ISE: BLT.L) 39bn2,632p1,667p1,829p8.88.6
Rio Tinto (ISE: RIO.L) 43bn4,712p2,713p3,047p7.26.7
Xstrata (ISE: XTA.L) 25bn1,551p763p813p7.56.3

BHP Billiton year ends June, others end December. p = pence.

Why so cheap?
Most of those low points were in October 2011, but the sector has been getting very close again recently. The underlying worry is the state of the world economy, in particularly the Chinese slowdown. It's also currently exacerbated by the forthcoming interim reporting season, which most commentators are very uncertain about -- and if there's one thing the market hates, it's uncertainty. But I think the pessimism is badly misplaced.

But the metals and minerals produced by these miners underpin the entire global economy, and if the valuations in the table were genuinely indicative of the long-term value of world business, then we'd truly have an unholy economic mess to look forward to. Which, of course, we don't, right?

Is Rio Tinto -- one of the world's largest producers of iron ore, aluminum and copper -- correctly valued on a price of just 7 times prospective earnings? That's half of the long-term valuation of the FTSE 100, which tends to average around 14.

Or how about Xstrata, one of the globe's biggest suppliers of copper, but also mining large quantities of coal, zinc, lead, and nickel? Is that really only worth 7 times earnings? I certainly don't think so.

It's the same with the others. BHP Billiton produces another serious portion of the world's iron ore supply, plus other base metals, coal, and petroleum. Anglo American is another iron producer, also supplying manganese, copper, platinum, and yet more coal. Then the smallest of them all, Antofagasta, mainly digs up copper.

Even if we made a conservative estimate of a fair long-term P/E valuation of only 10, to allow for cyclical business risk, that would still suggest a target price of around 42 pounds for Rio Tinto, which is 40% up on today's price -- and the implied percentage rise in the others would be similar.

An alternative way to invest?
But what if you don't want to buy miners directly, but still want to invest in a commodities recovery?

You could try something like Anglo Pacific Group. It's in the mining sector, but doesn't actually do any digging and delving. Instead, it owns a number of mines, extracting coal and various metals, and takes royalties from them. At 280 million pounds, it has a lower market cap than the big miners we've looked at, and it's on a prospective P/E of approximately 18.

Another alternative might be to go for exchange-traded funds that specialize in commodities. If that floats your boat, the ETF Securities website has information about funds based on gold, oil, metals, and all sorts of commodities.

But whichever way you do it, I reckon there's gold in them there mines!

Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.

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At the time this article was published Alan does not own any shares mentioned in this article. The Motley Fool has adisclosure policy.
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