As a rule, I prefer to buy FTSE 100 stocks after they’ve fallen, rather than after they’ve just gone off like a rocket.
Buying out-of-favour stocks feels safer to me. I know that’s a bit silly, because there’s often a good reason why nobody else will touch them. But it does make them cheaper, and potentially reduces some of the downside risk.
I’m wary of buying momentum stocks because I hate coming late to the party. Chasing strong past performance feels like a rookie error. So I’m viewing the Anglo American (LSE: AAL) share price with extreme suspicion right now.
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Stock of the month
The globally diversified mining giant is up a mighty 21.29% over the last week and 37.83% over one month. However, this is a sudden spike after a difficult run. Despite those strong figures, Anglo American’s up a relatively modest 8.38% over 12 months.
I last reviewed the stock on 20 January, at a point when its shares were down 50% in a year. Earnings had been smashed by a combination of geopolitical uncertainty, higher energy prices, falling production, global supply chain issues and extreme weather. Higher input prices costs due to inflation hadn’t helped.
I was also worried about China, which looked rocky at the time. Plus, I was waking up to the fact that we won’t get six interest rate cuts this year as hoped, keeping borrowing costs high and acting as a break on the global economy and demand for metals and minerals.
I decided against buying Anglo American but feared I might be wrong and it could ‘snap back like a piece of elastic’. And so it has. Although not for a reason I anticipated.
The Anglo American share price skyrocketed after it was subject to an unsolicited £31bn all-share takeover bid from Australia’s BHP Group, in a deal that would create the world’s largest miner and copper producer.
I’ll stick to my knitting
It’s a bold move, and the Anglo American share price was only going one way. However, as a rule, I don’t buy on takeover talk. In my experience, nine times out of 10 it leads to nothing, and the stock crashes as fast as it climbed. Given that BHP’s bid was unsolicited and conditional, I think the dangers are high here.
Of course, Anglo American could rise higher, if other bidders enter the fray. Some have suggested that today’s share price of £26.56 could hit £30. If I bought today and that happened, I’d bank a quick 13% profit.
However, I’m an investor, not a trader. Chasing quick profits doesn’t interest me. It increases the chances of making a quick loss instead. Which I don’t like doing because losses are hard to make good.
I have a balanced portfolio of long-term FTSE 100 holdings, with exposure to the commodity sector via Glencore. I don’t need to get mixed up in takeover turmoil. If I bought Anglo American amid the current froth, I could easily end up overpaying, and find myself in the red within weeks.
I had my chance in January. I’m not going anywhere near the stock while BHP hovers. I might change my mind if it backs off and the share price falls as a result.
