Is it time to sell Glencore plc and Anglo American plc?
The bet has paid off handsomely for those investors who took the plunge and brought into the mining sector recovery at the end of 2015. Year-to-date shares in Glencore(LSE: GLEN) and Anglo American(LSE: AAL) have risen by 118% and 190% respectively, significantly outperforming the FTSE 100, which returned 9.3% over the same period.
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But the big question these investors will now be asking is, can these miners repeat year-to-date gains or is it time to sell?
Time to sell?
It has become apparent over the past nine months that at the end of 2015, the market was extremely bearish on the outlook for commodities. As investors rushed to exit the sector, shares in the miners plunged to lows not seen for decades. There was also plenty of speculation about the solvency of some of the world's largest miners.
However, nearly a year on it looks as if investors are no longer afraid to invest in the commodity sector although the fundamentals of the industry haven't improved that much over the same period. The prices of the main commodities remain depressed and as global growth slows, the outlook for commodity prices isn't getting any brighter.
It looks as if the recent rally in mining shares has been driven mainly by an improvement in sentiment. Management teams at the big miners have been doing everything they can to cut costs and reduce borrowing, which has also helped improve investor sentiment. But with commodity prices stagnating, it remains to be seen how much longer investors will view the sector in a favourable light.
Which is my pick of the two?
For the six months ending 30 June, Anglo reported a loss before tax of $364m. Group revenue fell 20% year-on-year, underlying earnings fell 23% and underlying earnings before interest and tax fell 27% year-on-year.
That being said, for the period the company did report $1.1bn of free cash flow, although the majority of this extra cash flow came from cuts to capital expenditure. For the first half, capex was reported at $1.2bn, down from $2bn last year, which is arguably an unsustainably low level. Nonetheless, City analysts expect the company to report earnings per share of 51p this year, implying that the shares trade at a forward P/E of 13.3. Analysts have pencilled-in earnings per share growth of 13% next year. So, from a valuation perspective, Anglo's shares might have room to push higher as earnings grow.
Glencore's valuation, on the other hand, implies that the company's shares may have got ahead of itself this year. At present, the shares are trading at a forward P/E of 40.7. City analysts expect earnings per share to grow by 58% next year but even after this explosive growth, the shares will still be trading at a forward P/E of 27.
With such a lofty valuation and a lack of fundamentals underpinning the sector, it might be wise to sell or avoid Glencore.
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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.
