Question: I have been a long-term holder of both BHP and RIO but I must say of late, especially this year I have seen a continuing fall in both stocks. I was holding out on BHP for South32 but I am unsure if the wait is worthwhile. Can you provide some thoughts on the two stocks and whether it is worthwhile to hold?
Answer (by Paul Rickard): I share your bearish view about the outlook for these stocks. While both companies have made good progress on cost and capital management disciplines, and are working hard to reward shareholder with dividends, I see little upside in the price of the underlying commodities they supply. In fact, the bear market is very much in place with iron ore.
Arguably, it may be in their hands to change this trend – by reducing supply. However, they don’t want to go down this path (yet!).
The brokers remain optimistic on these stocks. According to FN Arena, sentiment on BHP is positive at +0.5 (scale -1.0 is most negative, +1.0 most positive) with a consensus target price of $35.30. For RIO, sentiment is +0.8, and the target price is $72.76.
What to do? I think it depends on your position. If you are overweight, then I would be inclined to sell and re-invest in a part of the market more likely to respond to lower interest rates. If you are underweight, then you might be inclined to hang on and ware some of the short-term pain.
Question 2: In relation to Peter’s “buy the dips” I am trying to understand if there is definition for the “dip”. I’ve scoured through your archived reports but can’t seem to find any such definition. So my question is … What defines a dip? Is it more like what happened in q3/q4 2014 with the oil price drop, or is it simply the small one per centers which occur from time to time like during the middle of this month?
Answer 2 (by Peter Switzer): Unfortunately, there is no standard definition for “buy the dips”.
Technically, “corrections’’ are defined as a 10% drop from the market high, and a “bear” market when the market is now 20% away from its most recent high.
So, while I can’t quantify the statement, it is typically less than a “correction” and movement in the order of 4% to 6% from the most recent high.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
