First, a disclaimer: I have no idea what is going to happen, and what I know about commodities could be written on the back of a postage stamp. Got that?
A couple of days ago I decided to increase my holdings in copper-miner KAZ (KAZ Minerals) and platinum miner LMI (Lonmin). I bought a position a year ago, which I lost money on because I wasn’t confident in my analysis.
However, I changed my mind last week. There has been so much bearishness in commodities, with experts saying it would go lower, I figured that it was now or never to take the plunge.
If you take a look at LMI, for example, it is on a PBV of 0.5, and a PER of 29.92. It’s relative strength over 5 years is -87%. It is carrying very little debt. This thing is screaming as a contrarian buy.
Long term, I am bearish on commodities. My working hypothesis at the moment is that we’re in the last leg of a bull market. Cyclicals should do well. Until they don’t, of course. China seems to have alot of inventory in things like copper. The common perception is that China is cannily “building” inventory. I’m not so sure about that analysis. I think they will want to dump a fair amount of it if copper surges.
The thing about China is, is it’s a very top-down driven economical system. We’ve seem things like building empty cities. Seriously, what does that tell you? If there’s one thing that people forget about growth, it’s this: growth at any price is not good, if your rate of return is below the cost of capital, then growth is actually value-destructive. China may boast as to how its economic policies ironed out the problems in 2008/9. In my opinion, China has been misallocating capital on a collosal scale.
it’s all just theory, of course. I’m just playing a value-investing game. When a sector has had the stuffing knocked out of it, and companies are trading at a PBV of 0.5, I figure it’s time to buy. I figure that most companies should be trading at book, at least.
Wish me luck.