Miners look cheap

I’ve seen POL (Polo Resources) mentioned on the Motley Fool in Pauly Pilot’s Pub. The simple value case is: shares 11.25p, NAV 31p, net cash 8p.

It prompted me to do a search on Stockopedia for low P/B stocks strictly between the range 0 to 1. The thing that pops out at me are the number of banks and miners on the list. Parenthetically, MRW (Morrisons) is also on the list, with a PE of 9. I know supermarkets are having a rough time of it lately, but it seems much more probably than not that MRW is undervalued. But I digress.

The fact that I am spotting a broad selection of banks and miners on low PBVs suggests to me that it is highly likely that both these sectors are undervalued, and worthy of investigation.

I know that everyone is worried about market tops and the China macro, but still, it seems unlikely that, as a group, resource companies are worth less than book.

I notice that KAZ (Kazakhmys) is one of the top gainers for today. It trades on a PBV of 0.50. I had made a purchase last year at around the 310p level, only to sell out at around 240p. KAZ now stands at 295p, for a gain of 35% YTD. So, I had played that one rather stupidly. I should have had more patience.

The banks are also interesting, and there’s no need for me to repeat the woes that have beset the industry over the last few years. FWIW, I have actually subscribed to the recent TSB IPO. Only a small amount, though, as I have been away on holiday until recently and couldn’t arrange larger funding. People are worried about the remaining 75% of TSB as an overhang, but for all I know that could work both ways. Look at it this way: they are unlikely to want to see investors get their fingers burnt now if it means that they’ll have to sell off another chunk in future. Also, being a forced seller is usually a happy occasion for a buyer.

I took a quick look at 6 banks: BARC, LLOY, STAN, BKIR, HSBA and RBS. All of them underperformed the Footsie over the last 5 years – a definite sign, if one were needed, that they are deeply unloved. Fully half of them are showing negative ROEs, and of the ones that are positive, they’re no great shakes. BARC is on a tiddly ROE of 4.3%, with a PER of 11.8. If it could double its ROE, its share price could  double. It is on a PBV of 0.7, so even if you thought it was only worth book, that would imply a 50% price appreciation. Pre-crash, BARC was trading on a PBV of over 2.

Now, I’m aware that the standard argument is that banking has entered into a “new normal” of permanently low PEs for banks. Maybe. But, contrariwise, it seems unlikely that shareholders are unlikely to accept abysmal returns forever. I would expect management to make the necessary adjustments to exit poor return business units, thereby increasing rates of returns eventually. Historically, banks have always been up and down anyway. They are not subject to technological obsolescence, so on should be sceptical of views that they will never earn a decent return.

Happy and prosperous investing to you all.


About mcturra2000

Computer programmer living in Scotland.
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