Should you dump Rio Tinto plc, Burberry Group plc and Prudential plc?
The last year has been tough for investors in Rio Tinto(LSE: RIO), with the iron ore-focused miner's share price declining by 26%. Clearly, much of this is due to the falling iron ore price and with Rio Tinto relying on the steel-making ingredient for the vast majority of its profit, its future prospects remain closely tied to the price of iron ore.
While this is a major downside of investing in Rio Tinto, the company is seeking to invest in its aluminium, copper and coal and other divisions so as to rebalance its exposure to commodities. However, this process will take a long time and so Rio Tinto's reliance on iron ore looks set to continue over the medium term.
Although this is a major risk for its investors, Rio Tinto's current valuation appears to take this negative aspect of its business model into account. For example, Rio Tinto has a price-to-earnings growth (PEG) ratio of 1.9 and while this is hardly dirt cheap, for a company with an ultra-low cost curve, sound finances and logical long-term strategy, it seems to be a very fair price to pay.
Also falling in value in the last year have been shares in Burberry (LSE: BRBY), with the luxury lifestyle brand recording a decline of 32% as its financial outlook has been downgraded. Part of the reason for this is a slowing China, although Burberry's diversified geographical exposure has helped to limit the overall impact of this.
For example, its bottom line is due to fall by just 4% this year before recovering to post a rise of 8% next year. Therefore, investor sentiment could pick up over the medium term and with China still representing a major growth opportunity for luxury lifestyle brands, Burberry's growth profile is rather enticing.
With Burberry having a strong balance sheet, excellent cash flow and a capable management team, it seems to possess the right ingredients to become an even more successful business in the long run.
Wide safety margin
Meanwhile, investors in Prudential(LSE: PRU) are also likely to be feeling unhappy with the performance of their holding in the course of the last year. That's because Prudential's shares have slumped by 17% during the period as the company's near-term forecasts have been downgraded.
In fact, Prudential's bottom line is forecast to fall by 7% this year, which is a marked deterioration on the last five years when it has recorded positive growth in each year. However, with growth of 9% set to return next year and Prudential having huge potential within the emerging world as financial product penetration increases in the coming years, it seems to be a highly appealing buy at the moment.
A consequence of Prudential's share price fall is that it now has a wide margin of safety. For example, it trades on a PEG ratio of 1, which indicates that despite its disappointing outlook for the current year, Prudential's shares could prove to be an excellent long-term investment.
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Peter Stephens owns shares of Burberry, Prudential, and Rio Tinto. The Motley Fool UK has recommended Burberry and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.