Trying to pick a bottom in equities or bottom-fishing can be a risky business. More often than not investors who bottom-fish fail to correctly pick the bottom and end up taking a position too soon.
As a result, investors can find themselves stuck in a position for longer than they expect and this may cause hefty losses.
That being said, there’s plenty of research out there that shows that contrarian value investing — another form of bottom-fishing — can generate some highly impressive returns over time. Some research has even shown that this strategy, when executed correctly, can outperform all other methods of investing.
And it’s my contrarian value side that’s attracted me to BHP Billiton (LSE: BLT) and Glencore (LSE: GLEN), two of the world’s most influential miners that have fallen out of favour with the market over the past 12 months.
Falling out of favour
Over the last year, shares in BHP have fallen 42% excluding dividends, underperforming the FTSE 100 by 32%. Meanwhile, shares in Glencore have lost more than 55% since the beginning of June last year, underperforming the UK’s leading index by 45% excluding dividends.
Investors have turned their backs on these miners as they’re concerned about falling commodity prices and high levels of debt. Low commodity prices are putting pressure on cash flows while elevated levels of gearing are suppressing BHP and Glencore’s financial flexibility.
Nonetheless, over the past six months, these miners have shown how their size can help them thrive while others struggle.
Quick reaction
Glencore reacted quickly to market concerns about the company’s ability to service its debt and continue as a going concern. Several months after the concerns arose, Glencore announced a plan to cut its net debt by $10bn by selling non-core assets and deleveraging its trading arm. And during February of this year, the company was given the stamp of approval on its debt reduction plan by a syndicate of 37 banks that offered up a credit line of $8.4bn, some $3bn more than they had previously made available to the company.
The new lending facility is unsecured, has no covenants attached to it and includes an option to extend by 12 months. With this facility in place, Glencore has no need of debt refinancing until May 2018 at the earliest.
For me, the most attractive thing about Glencore is the fact that the majority of the company is still owned by the group’s founders who are unlikely to let the business go to the wall anytime soon.
Return to growth
BHP hunkered down as the commodity downturn has picked up. The group cut costs and postponed the development of new projects until it had more clarity on the outlook for commodities. Now the firm is trying to take advantage of cheap service provider costs.
Management has recently set out plans to sanction $5bn of capital projects, drawing a line under three years of defensive measures to help BHP withstand the downturn. It’s this drive to expand while other miners are still adopting a defensive posture that makes BHP stand out from the pack and look attractive to me.