Should you prepare for bad news from BHP Billiton plc, Cairn Energy plc and Amec Foster Wheeler plc?

Are these 3 resources stocks about to endure poor share price performance? BHP Billiton plc (LON: BLT), Cairn Energy plc (LON: CNE) and Amec Foster Wheeler plc (LON: AMFW).

| 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.

The resources sector may have experienced a respite in recent months, but it still faces an uncertain future. Of course, this has always been the case since commodity price falls can happen at any time and go on to hurt the profitability of resource-focused stocks. However, with investors being keenly aware of this fact following the difficulties over the past couple of years within the resources sector, investor sentiment may turn much faster than it otherwise would do if commodity prices come under pressure.

Clearly, BHP Billiton (LSE: BLT) is one of the better diversified resources companies on the FTSE 100. However, even its share price has been severely hurt by the downturn and if commodities as a whole endure a difficult period, BHP’s share price could reverse the gains of the last three months where it has risen by 38%.

Looking ahead, BHP is forecast to increase its bottom line by 180% in the next financial year. And even after such strong share price growth of recent months, BHP’s improved financial performance does not appear to have been fully priced-in by the market. In fact, it trades on a price-to-earnings-growth (PEG) ratio of just 0.2 and this indicates that it has a relatively wide margin of safety. As such, and while a sustained fall in the price of commodities could cause its shares to fall, BHP still seems to offer a very enticing risk/reward ratio.

Worth buying?

Similarly Amec Foster Wheeler (LSE: AMFW) appears to be worth buying despite the risk from continued lows in commodity prices that have hurt investment activity in the sector. In response to the difficult trading conditions, Amec Foster Wheeler has initiated the sale process for multiple non-core assets and while its order book declined in value by 3% during the first quarter of the year, the company is still forecast to increase its bottom line by 4% next year. This could help to improve investor sentiment and show that even during challenging trading conditions, Amec Foster Wheeler is able to respond positively.

With Amec Foster Wheeler trading on a price-to-earnings (P/E) ratio of just 9.4, there’s significant upward rerating potential on offer. And with its shares yielding 4.4% from a dividend that’s covered 2.4 times by profit, it seems to be a sound buy.

Huge potential

Meanwhile, Cairn Energy (LSE: CNE) is a resources stock with huge potential to deliver long-term profitability. Its asset base is highly enticing and with it having a large cash pile, it appears to be well-funded. During a period where investor sentiment is rather low, Cairn’s strong balance sheet is a major plus for the company and its investors.

As with BHP and Amec Foster Wheeler, a sustained fall in the price of commodity prices could hit Cairn’s share price very hard. And the problem it faces is that because investors are somewhat nervous regarding the outlook for the resources sector, they may seek out companies perceived to be less risky than Cairn. In other words, businesses that are profitable and trade on low valuations. As such, and while Cairn could be a worthy buy for the long term, there seem to be better options elsewhere within the resources space.

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.

Peter Stephens owns shares of BHP Billiton. 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »