The old saying that it’s not timing the market that matters, but time in the market which makes all the difference has an element of truth. In other words, giving investment returns time to compound, rather than attempting to buy exactly at the bottom and sell right at the top, can prove to be the most effective long term strategy.
When it comes to the resources sector, though, investors may need to allow a lot of time for returns to come good. After all, miners, oil & gas businesses, and support services companies are enduring the worst period for many, many years and, looking ahead, there seems to be little hope on the near-term horizon.
In terms of timing, though, now seems to be an opportune moment for long term investors to buy into the resources sector. Valuations are very low, prospects are downbeat and margins of safety are relatively wide.
Rock-bottom
This situation is very evident when looking at resources support services company Cape (LSE: CIU). Its shares have fallen by 13% in the last year and now trade on a price to earnings (P/E) ratio of only 9. This indicates that there is significant upward re-rating potential on the cards, and this is further evidenced by Cape’s dividend yield, which currently stands at 5.9%.
Looking ahead, Cape’s bottom line is due to fall by 11% in the current year and by a further 1% next year. As such, there seems to be a lack of catalyst to push its shares higher over the short to medium term but, with dividends being covered 1.9 times by profit, its income prospects appear to be relatively secure. And, in the long run, even just a stabilisation in the resources sector, never mind a recovery, could lead to huge share price gains for Cape due to its current rock-bottom valuation.
Tremendous upside
Similarly, Lonmin (LSE: LMI) is also dirt cheap at the moment. Its shares have collapsed during the course of the last year, falling by 89% during the period. This means that they now trade on a price to book value (P/B) ratio of only 0.1, which indicates that there is tremendous upside potential.
Certainly, there is scope for asset write downs in future, and for the value of net assets to fall as a result of the losses that are forecast in each of the next two financial years. And, with its near-term future being decidedly uncertain due to the prospect of cash flow issues should the planned $400m rights issue not go ahead, Lonmin is clearly a high risk investment at the present time. However, with such a low valuation it could be of interest to less risk averse investors as part of a well diversified portfolio.
Encouraging progress
Meanwhile, Rockhopper (LSE: RKH) has also seen its share price fall in the last year, and is now down by 43%. Unlike Lonmin, though, Rockhopper’s finances appear to be in relatively good shape and sufficient to fund its near-term drilling programmes. On this front it has enjoyed considerable success in 2015 and, with Rockhopper having multiple assets in different locations, it appears to be better diversified than many of its exploration peers.
Furthermore, with Rockhopper making encouraging progress with regard to increasing gas production from its Guendalina asset, as well as exploration and production potential in the Falklands basin, it could prove to be a sound, albeit volatile, long term resources play.