The resources sector is hugely volatile and comes with a huge dollop of risk. However, as with any investment there is also upside potential among a number of its constituents, with the world’s largest silver producer Fresnillo (LSE: FRES) being a notable example.
Clearly, there is a huge amount of uncertainty regarding the prospects for the price of silver and in recent years it has been a major disappointment. Unlike gold, it is not seen as a particularly effective store of wealth, and while Fresnillo is also a gold producer, silver remains its main business and its price is likely to have a major impact upon its financial performance.
With Fresnillo’s shares having risen by 19% since the turn of the year, investor sentiment in the company is clearly on the up. And while its valuation is not as appealing as it was six weeks ago, Fresnillo still offers at least 20% upside over the medium to long term. A key reason for that is its growth outlook, with the company forecast to increase its bottom line by 81% in the current year. This helps Fresnillo to trade on a price to earnings growth (PEG) ratio of only 0.3, which indicates that its shares could rise by 20% or more and still be relatively cheap.
Also offering over 20% potential upside is Glencore (LSE: GLEN). Clearly, this is a relatively risky stock since Glencore has the potential to fall significantly if commodity prices tumble and if its refreshed strategy does not work out. Certainly, the recent update by the company indicated that its debt reduction plan was moving in the right direction, while it is gradually becoming increasingly efficient, too.
Glencore is forecast to increase its earnings by 19% in the current year and while this could realistically change depending on commodity prices, it puts Glencore on a PEG ratio of only 0.8. This indicates that there is considerable upside potential and while it is a very high risk play, long term, less risk-averse investors may wish to take a closer look.
On the topic of 20% rises, Nighthawk Energy (LSE: HAWK) has soared by more than that amount today, although it is still down by 71% in the last three months. Recent news for the company has been positive, with the oil development and production company releasing an annual production update just last week which stated that it expects revenue for the full-year to be significantly higher than market expectations.
Clearly, the price of oil could fall further and hurt Nighthawk’s long term profitability. But with the company forecast to record a pre-tax profit of over £6m in 2016, its forward price to earnings (P/E) ratio of 2.5 indicates 20% upside is achievable. As such, it may appeal to less risk-averse investors who can live with a high degree of volatility and risk.
