Everybody loves a winner, but they make me nervous. I'm always wary of investing in stocks after they've enjoyed a triumphant run, in case I leap on board just as the wheels come off the bandwagon. For that reason, I decided against backing the great 2016 commodity stock revival once it started to gain traction in the spring, deciding I had left it too late. Oops.
Out of a hole
Glencore(LSE: GLEN) was one of last year's biggest FTSE 100 losers, its share price crashing around 75% to a low of 71p in mid-January. Today, it stands at 238p, around 3.3 times higher. Its momentum remains explosive, with the price up another 20% in the last month alone. Diversified big boy BHP Billiton(LSE: BLT) saw its share price halve from 1,298p to 608p in 2015. Today it has recovered almost all of these losses, doubling your money to trade at a price of 1,218p. Again, the momentum has continued, with the stock up around 19% in the last month.
So what's driving these two stocks? Despite regular dire warnings about an impending Chinese crash, the juggernaut keeps rolling. GDP growth was a healthy-looking 6.7% in Q3, a figure that has held steady for the three successive quarters. Suspiciously steady, according to some analysts, who worry about the country's credit and housing bubbles. However, investors seem to be taking the view that while the music plays, you have to keep dancing.
China crisis deferred
BHP Billiton is a gas and oil producer as well as a miner, and should benefit from any further rise in the oil price. Chief executive Andrew Mackenzie has seen early signs of markets rebalancing, claiming energy markets will improve over the next 12 to 18 months, and noting that iron ore and metallurgical coal prices have been stronger than expected. However, he also admitted that supply is expected to continue rising faster than demand in the near term.
Mackenzie is positive on BHP Billiton's prospects, with "continued capital discipline, improved productivity and increased volumes in copper, iron ore and metallurgical coal" supporting strong free cash flow generation. Forecast earnings per share (EPS) growth of 183% in the year to 30 June 2017 suggests more cheer to come.
Glencore also has glowing EPS forecasts, with growth of 55% expected in 2017. That will halve its valuation from a whopping 96.8 times earnings to a still excessive 41.5 times, but investors are betting that it's on the right track. The sell-offs continue at Glencore, which is offloading its New South Wales Hunter Valley rail coal haulage business for $1.14bn. Every little helps the bottom line but debt still weighs on the business.
Last year's shake-out was a shock but forced the sector to cut out the fat, which should stand it in good stead if China does slow. Sentiment remains positive: Bank of America Merrill Lynch now rates BHP Billiton and Glencore as buys on the back of upgraded price assumptions for the metals and mining sector in zinc, nickel and coal. The bandwagon may keep rolling but I still reckon I've left it too late to catch a ride, although I might be wrong again.
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Harvey Jones 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.