Glencore (LSE: GLEN) shares are down 20% from their January high — a major buying opportunity in my view.
Sure, there is a risk that Glencore does not adequately increase regulatory oversight across its businesses. This is what prompted legal action against it last year.
However, it has agreed to having independent legal monitors for the next three years. And it looks to me like the 20% drop in the share price more than discounts this risk.
Another part of the drop comes from investors trying to identify the turnaround point in the share price, I think. In my experience as a former investment bank trader, this never works for smaller investors.
These turnarounds happen when major market players buy or sell massive blocks of shares through intermediaries. By the time smaller investors hear about it, they have missed the move.
As a small investor myself now, I find it better to play the long game. That is, to buy stocks based on fundamental factors at decent price levels.
To me, a 20% discount to this year’s high for Glencore shares is such a level.
Making money whether prices rise or fall
The company has also been hit by a lack of understanding about what it does, in my view.
As a top commodities trader, it has unparalleled data on its key markets – notably oil and gas, zinc, and copper. It is also a miner, so it can also influence the supply of these commodities to varying degrees.
Consequently, it has a huge informational trading edge to add to the great skill of its traders. And this means it can make just as much profit if prices go down as if they go up.
Fundamentals are supportive
This said, profits come easier when commodities prices are rising. And the outlook for oil and gas – one of Glencore’s core businesses – is currently bullish.
Saudi Arabia announced on 4 June a 1m barrels per day cut in its oil production for July. Production cuts boost oil and gas prices and more may come after the 3 August meeting of OPEC+’s monitoring committee.
The outlook for Glencore’s copper, zinc, and other commodities businesses is less certain. China has been the key buyer of these since the mid-1990s as part of its massive economic growth.
For many analysts, this is now in question. But I think they are missing China’s political will to increase growth this year to more than the expected 5%.
Stellar shareholder rewards
Glencore’s preliminary 2022 results proposed a dividend of 44 cents per share – or around 34p. At the current share price of around £4.70, this gives a yield of about 7.2%.
Additional disbursements may boost the payout figure. Last year, a record $5.6bn was paid out in cash dividends. A $1.5bn share buyback was also done.
These were supported by earnings forecasts on track to exceed estimates, according to the firm. The adjusted earnings before interest and tax range is $2.2bn-$3.2bn this year.
If I did not already have holdings in the commodities sector I would buy Glencore shares now. I think it will maintain its high dividend payouts. And I believe it might even recoup some or all of the 20%+ share price losses seen since January.
