Sunday, February 6, 2011

Mining and oil - probably not a bubble

If you look at Stockopedia's website, you can't help but notice the overwhelming number of articles about miners and oil and gas stocks. Everyone is talking about the Chinese demand for oil and commodities (actually, there seems to be some flip-flopping as people try to make up their mind as to whether China will continually fuel the demand for these items, or whether it's about to collapse).

So, it mining and the oil and gas sector in a bubble, or not? After all, BLT.L (BHP Billiton) has seen its share price rise seen its share price massively over the last decade, compared to a flat performance by the Footsie.

In Ken Fisher's book, The Only Three Questions That Count, page 287, took a look at energy stocks in 1980 and compared them to the technology stocks of 1999. He noticed similar patterns. These were at times when the sectors were in their respective euphoric bubble phases. His methodology was more thorough - he looked at the relative number of companies making IPOs, and the values thereof. I don't have that information, so I'm going to use one method he used: relative PBV. I'll add my own statistic: relative PE.

Here's what I found

       PBVr  PEr
Mining 0.95 0.88
O&G    1.25  n/a

O&G stands for Oil & Gas Explorers and Producers ("Oil Equipment - Servies and Distribution" are a different sector that I haven't bothered to analyse). Just to be clear here, PBVr is the PBV of the sector relative to a "market", and PEr is the PE of the sector relative to a "market". Here, the "market" is all the companies on the LSE with market caps over £300m (excluding Investment Trusts, for which I don't have any info).

As interesting statistics in themselves, the market had a PBV of 2.61 (I use the median figure), and a PE of 14.4. The PE seems dead bang in the middle of long-term averages, although I think the PBV may be higher than normal. The PBV for miners (median figure, NOT adjusted by market cap) was 2.49, giving a PBVr of 0.95 (= 2.49/2.61). Notice that on PBVr and PEr measure, miners are actually slightly cheap compared to the market, which in itself is probably at about fair value.

A similar picture emerges for O&G. They are only slightly more expensive than the market. The PE picture is fairly muddy here, because the median PE is -57; most of them are making losses (which, admittedly, seems a little odd given the price of oil these days).

When Fisher did his analysis on 1980 energy stocks, he found a PBVr value of 2.0 for energy compared to the S&P500. The PBV of the energy stocks was 2.6X at the time, compared to 1.3X for the S&P500. Looking at the technology bubble in 1999, he found a PBVr value of 2.5, being based on PBV for tech stocks of 13.9Xm compared to the S&P500 of 5.6X.

So the conclusion would appear to be that we are not currently in a commodity or O&G bubble, as valuations are by no means excessive (and might even be considered slightly cheap) compared to the rest of the market.

I own some BLT.L, BTW. It's on a PBV of 1.77, and a (rolling) PE of 12.6. Its share price is 2520.5p, and I noted in a previous post that directors seem to be buying in. The median yield for the market is 2.17%, and BLT is actually yielding 2.24%, so it's showing above median yield (although only slightly). It has a ROE of 25% for 2010, and projected earning for 2011 are 371.61c (a projected growth of 66%), and for 2012 it's 404.1c (a subsequent 9% increase). It has positive net current assets, and its net current liabilities is $26.5b. Its y/e results for 2010 show net profits of $12.7b; giving it a liabilities to net profits ration of about 2 - a very conservative figure. Its interest cover is over 40 - again affirming that its balance sheet is in good shape. It has been buying back shares. So, I'm quite positive on this company.

1 comment:

A W Frey said...

I work for Fisher Investments, and they recently announced the latest sector guide in the Fisher Investments On series: Fisher Investments on Utilities (announcement found here: There is also a guide dedicated to energy, which outlines investing in the oil sector.