Don’t you love it when a whole sector crashes and leaves us with lots of lovely cheap shares to buy? It was the financial sector a few years ago, and today we’re looking at a handful of others that are being crushed.
Oil will recover
BP (LSE: BP) confirmed at Q2 time that it had reached agreements in principle regarding the settling of all outstanding claims relating to the Gulf of Mexico disaster. And after the divestment of significant assets (with more planned), the company’s net debt situation looks stable.
Some higher-cost production has been shelved for a day when it’ll be more profitable, and cost-cutting has left BP in a fit state to handle a low-oil economy for several more years if necessary. I reckon it’s in a strong position for an upwards rerating when the oil price recovers — which it will, as quite a few oil-producing countries are not simply not viable at today’s prices, and they’ll eventually go bust if nothing else.
There’s a chance that oil will slip further in the shorter term, and the high dividends could be scaled back a little, and either would surely send BP’s shares lower. But putting aside the hopeless idea of trying to get the short-term timing right, I’m convinced we’ll be looking back in a few years at this being a golden time to have bought BP.
With the shares at 346p, BP is a long-term Buy for me.
Mining is not dead
The collapse of the mining sector has led to an efficiency shakeout which looks like it’s turning Glencore (LSE: GLEN) into a sleeker future profit machine. We heard this week that the firm has decided to sell some assets and issue new shares in order to get its debts down. It’s also suspending some copper production in the face of falling demand, and will stop paying dividends in the current commodities slump.
That should beef up the balance sheet nicely and leave Glencore’s long-term future looking healthier. In my view it’s exactly what the company should be doing right now — and the markets seem to agree, with the shares already up 18% since Monday morning’s announcement.
The demand for metals and minerals is never going to stop while there are humans on the planet, and the current slump will surely be a hardly-visible blip by the time most people reading this will have retired.
At 145p, I rate Glencore as another long-term Buy.
A super investment?
My third pick is one that I actually wouldn’t buy, but it is another that has been making all the right moves to improve its long-term future. It’s Tesco (LSE: TSCO), and the recently-announced sale of its Korean business could be the final big thing it needs to get its balance sheet healthy and give its cost-cutting an extra boost — although it’s ironic that its overseas expansion was seen as one of its strong points in the past.
The sale, expected to complete in Q4, will make a significant dent in Tesco’s debts and should boost its focus on its home market. At 192p the shares are on a forward P/W of 17 for February 2017, the year in which earnings are expected to recover strongly, so could Tesco too have finally passed the bottom?
Tesco’s operating costs are still quite a bit higher than Lidl’s and Aldi’s, but unlike those two it offers online shopping and home delivery, and that’s a big plus. But the shares are still too expensive for me.
