One Big Reason To Avoid Glencore PLC

There’s one key reason why investors should avoid Glencore PLC (LON: GLEN).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Glencore (LSE: GLEN) have been decimated over the past six months. The global rout in commodity markets has weighed on the highly leveraged company more than most. Glencore’s shares have fallen 60% during the past six months excluding dividends. 

Such declines are bound to attract value-oriented investors, who are always on the look out for unloved junk. Indeed, I must admit that I’ve been tempted to take a position after Glencore’s recent performance.

However, while Glencore looks cheap now, I’m staying away from the company for the following reason. 

Should you invest £1,000 in Ishares Public Limited Company - Ishares Core Ftse 100 Ucits Etf right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ishares Public Limited Company - Ishares Core Ftse 100 Ucits Etf made the list?

See the 6 stocks

A classic mistake 

Glencore has made one huge, rookie mistake during the past five years. The company ploughed money into its expansion at the top of the commodity supercycle, paying top dollar to acquire then-peer Xstrata. 

As any seasoned investor will tell you, the key to successful investing is to buy low and sell high. Unfortunately, as research as shown, most investors tend to do the opposite, buying high and selling low, which erodes wealth and returns over time. 

And it seems as if Glencore has fallen into this trap. Only a year after Glencore acquired Xstrata, the company wrote down the value of its acquisition by $10bn. Then, last year Glencore paid $1.6bn for Africa-focused oil producer Caracal Energy. But last month, Glencore revealed that it was writing down the value of Caracal by $790m, as low oil prices weighed on asset values. 

Glencore is also selling a number of other assets to try and improve its balance sheet.

The group is being forced to make these sales as part of management’s effort to reduce the company’s $30bn debt pile. Yesterday, Glencore announced that it was planning to sell the firm’s Australian copper mine in Cobar, New South Wales, and its Lomas Bayas copper mine in Chile.

Fire sale

“A fire sale” is the only way to describe Glencore’s decision sell these assets. Since the beginning of 2011 the price of copper has fallen by 47% and now sits at a six-year low. So Glencore really is “selling low”. 

A recent sale by Anglo American shows what sort losses Glencore could be facing by selling these assets at the bottom of the cycle. Anglo American recently sold its Mantoverde and Mantos Blancos mines in Chile for $300m, rising to $500m if the copper price goes up. That’s an uplift in value of 67%. 

It’s a trap

One of the most difficult parts of value investing is avoiding value traps. 

However, value traps are difficult to spot and finding them isn’t an exact science. More often than not, investors find themselves being sucked into a value trap without realising it. 

Still, value traps usually exhibit three key traits, one of which is the destruction of shareholder value through the misallocation of capital and poorly timed acquisitions. It’s pretty clear that Glencore is guilty of this.

What’s more, with a $30bn debt overhang the company might be forced to sell off more assets at rock-bottom prices to appease creditors. Although it should be said, Glencore’s creditors have reassured shareholders that they aren’t planning to pull the plug on the company anytime soon. Nevertheless, in this market nothing is certain. 

Overall, it could be wise to stay away from Glencore for the time being.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Ishares Public Limited Company - Ishares Core Ftse 100 Ucits Etf right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ishares Public Limited Company - Ishares Core Ftse 100 Ucits Etf made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Man smiling and working on laptop
Investing Articles

3 FTSE 250 shares with low P/E ratios and sky-high dividend yields!

Searching for the best bargains that London has to offer? Here's a handful from the FTSE 250 I think are…

Read more »

Investing Articles

Why is Apple stock lagging the S&P 500 in 2025?

Our writer is wondering whether now might be an opportune time to snap up shares of the largest company in…

Read more »

Investing Articles

Here’s how an ISA investor could build a £20k passive income with UK shares

Looking to make a five-figure passive income in retirement? Here's how a blend of UK shares and cash savings could…

Read more »

Investing Articles

£10,000 in savings? Here’s how an investor can target £3,560 in annual passive income

Paul Summers explains how an investor could target making thousands of pounds in passive income by holding great dividend stocks…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Up 490%, Lion Finance Group is a new name on the FTSE 250… but what is it?

Many investors won’t be familiar with Lion Finance Group, but the FTSE 250 stock has surged 490% over five years.…

Read more »

Growth Shares

I think this is the most punished FTSE stock in the market right now

Jon Smith talks through a FTSE company that has endured problems but is one he believes has a brighter future…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Stock market correction! 1 growth share down 53% to consider buying now

This writer highlights a growth stock that has hit a rough patch in recent weeks. Here's why it might be…

Read more »

Investing Articles

Here’s why the Tesco share price has dropped 18% in a month!

Tesco's share price has lost nearly a fifth of its value since mid-February. Is this FTSE 100 dividend stock now…

Read more »