Why investors are flocking to Glencore but dumping IAG today

The Motley Fool
IAG British Airways plane
IAG British Airways plane

At the Motley Fool, we don't' believe short-term market movements are at all helpful for the long-term investor. If anything we believe that by placing too much weight on short-term movements, long-term investors can severely handicap themselves.


That being said, short-term trading patterns aren't entirely useless for the investor with a long view. A sudden change in market sentiment can throw up very attractive opportunities for those patient investors who are willing to act when the time is right.

Today's market sentiment data shows that investors are flocking to Glencore(LSE: GLEN) after the mining company's recent performance, but dumping International Consolidated Airlines (LSE: IAG). So is that good news for investors prepared to play the long game?

Weak sentiment

It's clear why IAG has fallen out of favour with investors. The airline industry is currently facing multiple headwinds. Terrorism overseas has dented tourism numbers to some of the biggest holiday destinations in Europe and at the end of last week, EasyJet shocked the market by issuing a profit warning that was a direct result of the pound's weakness.

For long-term investors, these developments are relatively insignificant. The British pound's volatility is a once-in-a-lifetime event, and the airline industry has repeatedly shown that it can recover from a sales decline caused by extremism. And with this being the case, long-term investors might benefit from taking a position in IAG to capitalise on recent weakness.

City analysts expect IAG to report earnings per share of 76p for the year ending 31 December 2016 so the shares are trading at a forward P/E of 4.9. With such a low valuation you could be forgiven for thinking that IAG is in trouble but this isn't the case and as the above shows, it's issues in the wider industry that are damping down enthusiasm for the stock.

Granted, analysts believe the company's earnings per share will fall by 5% next year, but even after this decline, IAG is still on track to earn around 72p per share for 2017. The shares support a dividend yield of 5.5% at current prices.

Too far too fast

Shares in Glencore are up by 155% year-to-date, and it would appear that short-term traders believe the company's shares are going a lot higher in the near term. The company's long-term future, on the other hand, is much harder to attempt to forecast.

Glencore's success is dependent on the commodities markets and global economic growth. Over the long-term, it's highly probable that the global economy will continue to grow and more commodities will be needed to fuel that growth. However, trying to place a value on Glencore's shares is almost impossible.

Based on City estimates, shares in the company are currently trading at a forward P/E of 41.5. Analysts have pencilled-in earnings per share growth of 50% next year giving a 2017 forward P/E of 27.3. But Glencore's earnings are highly volatile. For example, between 2011 and 2014 Glencore's earnings per share fell 70%, the company slumped to a loss in 2015 and is expected to report a small profit of 5.5p per share this year, nearly 90% below 2011's reported earnings per share.

These numbers illustrate how difficult it is to try and predict what the future holds for Glencore. With such a volatile future ahead, maybe the company isn't such a good investment for the long-term buyer.

Make money, not mistakes

The Motley Fool believes that market timing or trying to second guess where the market is going is a waste of time and money, and several academic studies have shown this to be true.

One such study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, under-performing the wider market by around 5.3% annually. Such a poor performance could literally cost you hundreds of thousands of pounds.

Trying to time the market is just one of the mistakes investors make that was identified by the DALBAR study. To help you realise and understand the other most common mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.