If we investors steer clear of cyclical stocks right now, we can hardly be blamed. Global growth is slowing down, and continued uncertainty around the US-China trade war and of course, Brexit, isn’t helping either. Quite the contrary. But disciples of Warren Buffett’s sage advice would know better, and would “buy fear”.
Bringing in the cash
For that reason, I am sorely tempted to consider Australian mining giant Rio Tinto (LSE: RIO), which was the biggest FTSE 100 gainer at the end of last week. Its share price rose by almost 4% from the previous close and is up by over 7% on Monday at the time of writing. This is most likely because of the burst of positivity induced with a press release on Thursday titled “Rio Tinto well positioned to sustain strong returns”.
According to this, the company expects to generate a significant $10bn in free cash flow in 2019. This is quite a positive development considering that it clocked less $342m in cash flow in the 2018 fiscal year.
Hitting gold, figuratively
And this is hardly the only positive for the company in recent times. It recently hit what it calls a “eureka moment” after it accidentally found lithium deposits while looking for gold in California. Lithium is a component of batteries in electric vehicles (EVs), which are a minuscule but growing part of the vehicle market. I have long argued that the times we are living in may well be the age of disruption across sectors, given the rapid structural changes under way, and this may well be a pretty important development for RIO.
Evolving technology, rising consumer eco-consciousness and changing preferences are altering markets and, by extension, businesses, fundamentally. In this process of ‘creative destruction’, which will necessarily make some segments redundant and throw up promising new ones, EVs may well be the one segment to hit a positive tipping point in the coming decades.
Good returns, dirt cheap
This adds to the long-term prospects of the company, which has already displayed solid financial health in recent years. While its share price had plenty of ups and downs last year, it does give plenty of opportunity for capital gains over the longer term. In fact, since the last I wrote about it almost a year ago now, the share price is up by over 21%. By comparison, the FTSE 100 has risen by only around 8%, making Rio Tinto, at the very least, an index-beating investment.
I suspect that given the present times and our persistently unknowable future, RIO’s share price will continue to show more of these same trends. And by that I mean a lot of ups and downs in the short term but a broad rise over the longer term. I would buy it today.