{"id":60341,"date":"2014-09-15T02:59:43","date_gmt":"2014-09-15T06:59:43","guid":{"rendered":"http:\/\/countingpips.com\/?p=60341"},"modified":"2014-09-15T02:59:43","modified_gmt":"2014-09-15T06:59:43","slug":"is-it-too-risky-to-buy-resources-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/09\/is-it-too-risky-to-buy-resources-stocks\/","title":{"rendered":"Is it Too Risky to Buy Resources Stocks?"},"content":{"rendered":"
September 15, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Have we got it wrong?<\/p>\n

We’ve been bullish on stocks.<\/p>\n

We’ve predicted that the Australian share market<\/a> will hit 7,000 points early next year.<\/p>\n

We’ve also predicted that the Aussie market will triple within the next 3–5 years.<\/p>\n

But is that prediction under threat? Australia is a resources economy. Things don’t look great for resources.<\/p>

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That would be bad news for resources stocks<\/strong><\/a>. So, what do we make of it? Is it time to reassess our bullish view…?<\/p>\n

The truth is, as an investor, you should always reassess your view.<\/p>\n

The worst thing you can do is take a one-eyed view of the market and then never change.<\/p>\n

If you’re always bullish, you’ll take a big hit when the market falls.<\/p>\n

If you’re always bearish, you’ll miss out when the market takes off.<\/p>\n

One thing we’ve learned after nearly 20 years in the market is to never have a one-eyed view. Markets go through cycles. That means you’ll get ups and downs.<\/p>\n

The trick is to always try and stay one step ahead of the cycle.<\/p>\n

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Is this a bullish or bearish cycle?<\/strong><\/h2>\n<\/p>\n

So, where is the cycle?<\/p>\n

Well, it depends who you believe. Take these headlines during the past year:<\/p>\n

Commodity ‘Super Cycle’ is Seen Enduring by McKinsey<\/em> — Bloomberg, 26th September 2013<\/p>\n

Goldman Sees New Commodity Cycle as Shale Oil Spurs U.S. Growth<\/em> — Bloomberg, 14th January 2014<\/p>\n

Goldman Forecasts Lower Commodity Prices as Cycle Ends<\/em> — Bloomberg, 16th July 2014<\/p>\n

Don’t let the second headline fool you. The ‘cycle’ mentioned in the headline referred to Goldman Sachs’ view that commodities<\/a> were heading into a bearish<\/em> cycle.<\/p>\n

As Jeffrey Currie, the head of commodities research at Goldman, told Bloomberg<\/em> in January:<\/p>\n

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‘I can’t tell you about one commodity out there that has a bullish supply-side story. A decade of higher commodity prices generated a supply response.<\/em><\/p>\n

‘The rotation away from emerging markets and towards developed market demand as well as the supply increase, particularly the U.S. shale revolution, are creating a new commodity cycle. On net, this new commodity cycle eventually suggests a structural bear market in commodities, but we believe that is still in the distant future.<\/em>’<\/p>\n<\/blockquote>\n

If the iron ore price<\/a> is anything to go by, perhaps the commodities bear market isn’t so far into the future after all.<\/p>\n

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It’s not easy to replace a resource<\/strong><\/h2>\n<\/p>\n

Last week the iron ore price sunk to US$82.50. That’s a 40% price drop on the year.<\/p>\n

If that’s not a bear market, then we don’t know what is.<\/p>\n

But here’s the thing. Yes, falling and low commodity prices can be bad news. But it’s not bad news for everyone.<\/p>\n

And contrary to popular opinion, it doesn’t mean you should avoid investing in the sector. In fact, as a contrarian, resources stocks should remain one of your key speculative plays over the next 18 months.<\/p>\n

Here’s why…<\/p>\n

Resources stocks aren’t the same as most other stocks.<\/p>\n

Sure, you can use standard valuation methods on a copper, gold or oil stocks. But the best way to play resources stocks is to think of them as pure speculations.<\/p>\n

Remember, unless a mining company discovers a new resource, it’s always depleting its core asset.<\/p>\n

That’s not true of a manufacturing company or a retailer. When a smartphone maker sells one of its products, or a retail store sells a shirt or a tie, it simply restocks.<\/p>\n

A mining company can’t easily do the same.<\/p>\n

It costs a phone company or retailer just a few dollars to replace each one of its sold products. It costs a mining company millions of dollars to replace its ‘products’. And some miners can’t replace their ‘products’ at all.<\/p>\n

That’s what makes resources stocks such a great speculation. Because when they do find a replacement product (a new resource), typically the stock prices shoots up like a rocket.<\/p>\n

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Big opportunities still exist in resources<\/strong><\/h2>\n<\/p>\n

All the talk about resources stocks right now is about how it’s a tough market.<\/p>\n

That’s true. But that doesn’t mean you can’t make money from mining stocks.<\/p>\n

In just the past few months we’ve seen a handful of resources stocks take off as a project has gotten the go ahead or the company has boosted its resources.<\/p>\n

We’re talking about the tiny liquefied natural gas stock that’s now up 907% since we tipped it two years ago<\/a>.<\/p>\n

We’re talking about the small ASX-listed African oil and gas explorer that’s now up 136%.<\/p>\n

And we’re talking about the uranium stock (who’s brave enough to touch uranium?) that has blasted off by 74%.<\/p>\n

This is the most important thing to remember. Yes, you can value a mining stock on cash flows, profits, and balance sheets, but that’s all secondary stuff. The most important influence on a mining stock, especially an explorer, is whether the company can find a huge resource.<\/p>\n

If it can, then the stock stands a good chance of taking off regardless of what’s going on with the wider market.<\/p>\n

This is why we see a huge opportunity<\/a> in resources stocks. While most others are pulling the pin and fretting about falling iron ore prices, we’re keeping our eyes open for the great punts that scared investors are beating down unfairly.<\/p>\n

Resources stock investing isn’t risk-free, but if you’re after a punt with a small part of your portfolio, this is a good place to start.<\/p>\n

Cheers,
\n Kris+<\/a><\/strong><\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post Is it Too Risky to Buy Resources Stocks?<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

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\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Have we got it wrong? We’ve been bullish on stocks. We’ve predicted that the Australian share market will hit 7,000 points early next year. We’ve also predicted that the Aussie market will triple within the next 3–5 years. But is that prediction under threat? Australia is a resources economy. Things don’t look great […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-60341","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/60341","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=60341"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/60341\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=60341"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=60341"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=60341"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}