Welcome to February, and results season for many ASX companies.
Between now and the end of the month, companies with a December 31 year end will report their results to the market.
The good news is the AFR is reporting the earnings season forecast to be the most positive since the GFC, although growth is expected to be heavily skewed towards the mining sector.
Having been in this game for over 25 years, one of the first things I was taught about mining stocks is the time to buy them is when their P/E's are sky high (because earnings have cratered) and their dividend yields are virtually non-existent.
Like this time last year…
Since then, the BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) share prices have both soared over 70% higher. Not bad for two of the largest companies in the country.
A doubling of the iron ore price over the past 12 months helps.
So are mining stocks a buy today?
Not for me, as I'm sworn off mining stocks for life.
For you?
Who knows? I don't. But if I were a betting man, I'd wager the iron ore price won't double again in the next 12 months.
Still, it doesn't need to for a company like Fortescue Metals Group Limited (ASX: FMG).
Just yesterday "new force in iron ore" reported it had cut cash costs per wet metric tonne to just $US12.54. When you are getting almost $US65 per tonne for deliveries, and you're shipping 170 million tonnes per year, that turns into a very tidy profit.
No wonder the Fortescue Metals share price is up 285% in the last 12 months, now trading close to $7.
I tip my Foolish hat to them. Congratulations. And to all the shareholders who bought a year ago, and/or hung on through the bad times.
There could be still further gains ahead for the Fortescue share price. The company continues to cut costs. It's paying down debt at a frantic pace, opening up the possibilities of sharply higher dividends and share buy-backs. Demand from China is solid. Trumpenomics promises big infrastructure spending in the US.
Valuation-wise, Fortescue trades on a forward P/E ratio of around 9 times earnings, and a forward dividend yield of around 5%, fully franked.
If only I could predict the future iron ore price…
As for the non-mining sector, earnings growth is expected to be much more modest.
According to the AFR, the boffins at Citi are predicting banks — those darlings of many retirees and SMSFs — will grow earnings by just 2.7%.
And that's with house prices in Sydney and Melbourne still soaring higher and higher…
I'm happy to pass on the banks, even with their 5% fully franked dividend yields.
Another thing I was taught many moons ago is that banks should trade at a discount to the market, not a premium. And that you should look to buy them when they trade on a P/E ratio of around 10 times earnings and around one times book value.
(That said, some old school value curmudgeons will say even that's too expensive, and that the time to buy banks is when the P/E is 6 and the price to book value is 0.5.)
With its share price trading at around $81.50, Commonwealth Bank of Australia (ASX: CBA) shares are trading on a P/E ratio of around 15 times earnings, and a price to book value of 2.3 times.
Those sorts of numbers look to me like the definition of low upside potential and significant downside risk… the exact opposite of what you should be looking for in an investment.
Still, what do I know? I've been avoiding the banks for years, and although they haven't exactly set the world on fire, they haven't crashed to earth in a burning mess.
And in a low interest rate environment, a 5% fully franked dividend yield is hard to knock.
A better bet might be Mantra Group Ltd (ASX: MTR).
Mantra is one of the country's largest accommodation providers, operating under the Peppers, Mantra and Breakfree brands. Mantra doesn't own its properties, but rather operates under long-term contractual agreements — making it a leaner, higher yielding operation.
The ongoing boom in international travel is providing an especially potent tailwind, and the company is growing nicely.
At a share price of $2.85, Mantra Group shares trade on a P/E of around 15 times earnings, and a trailing fully franked dividend yield of 3.7%, which grosses up to around 5.3%. With their growth profile, and acquisition opportunities aplenty, they could turn out to be a better long-term bet than Commonwealth Bank.
Time will tell. We'll find out more when Mantra Group report results on Friday February 17th, two days after Commonwealth Bank.
