This stock is up 275% this year but will these gains continue?

Buying when there’s blood in the streets, being greedy when others are fearful and investing against the market are all different ways of describing contrarian investing. Some of the world’s most successful investors say acting as a contrarian investor has helped them beat the market over the years, but when it comes down to it, most investors just don’t have the stomach for contrarian investing.

This time last year shares in Anglo American (LSE: AAL) looked like they were heading to zero. City analysts were warning of the company’s imminent demise and investors were dumping their stock in the company as fast as possible. During the second half of 2015, shares in Anglo dropped by 71%. Between mid-2012 and early 2016, 90% of the company’s equity value was wiped out. This year the story couldn’t be more different.

Year-to-date, shares in Anglo are up 275%, or 390% from the January lows — a rich reward for those investors who were willing to take the plunge at the bottom of the market. The big question for investors now is, after this wild ride will shares in Anglo continue to push higher, or trend lower as investors book gains?

What’s in store for the company?

From a fundamental perspective, it looks as if shares in Anglo are fairly valued after this year’s performance. City analysts expect the company to report earnings per share of 77p this year, indicating that the shares currently trade at a forward P/E of 12.5. Over the past 10 months, analyst estimates for Anglo’s earnings have varied considerably making it difficult to say whether or not current figures can be trusted. 

For example, at the beginning of the year analysts were expecting less than 20p per share in earnings for 2016. Rising commodity prices are almost entirely to blame for this sudden change of heart, which highlights larger problem investors face when trying to analyse miners. 

Extremely volatile

Commodity prices are extremely volatile and trying to guess where they will be in 12 months’ time is nothing but pure speculation. The knock-on effect of this volatility is that trying to place a future value on shares in miners such as Anglo is almost impossible. Yes, if commodity prices continue to rise, Anglo’s shares could move a lot higher. On the other hand, if commodity prices begin to fall for some reason, shares in Anglo could retrace some of this year’s gains. 

Still, City analysts don’t expect commodity prices to fall again any time soon. Earnings per share growth of 47% is pencilled-in for this year and growth of 12% is expected next year. Further, as earnings return to growth, analysts are expecting the company to reintroduce a dividend payment. A dividend of 11.9p per share is expected for 2017 giving an estimated yield of 1.1% at current prices. 

So overall, based on these estimates, it’s possible that shares in Anglo could continue to head higher even after recent gains.