The Motley Fool

Rio Tinto, other miners still a buy

With interest rates at the lowest point in well over 30 years, now is the time to start looking to the stock market to make your hard-earned money work for you.

Well-known companies are too expensive but Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have been analyst favourites for quite some time and the last week has shown us why.

With the S&P/ASX 20 (ASX: XTL) getting more and more expensive, it was always likely Rio and BHP’s share prices were going to jump. Whether that jump is here to stay is another question altogether. However, since BHP and Rio are the only companies out of the top 20 to have P/E ratios below 15 (Rio’s is 11), it was almost guaranteed.

Last month I said that mining stocks could still be a buy for investors. Despite having some intense volatility, which is likely to persist into the future, I continue to believe they can impress investors. I took my own advice and bought my exposure to the sector through Rio when the company dropped to $52 a share, currently at $57.39, and I’m enjoying a gain over 10%.

Another alternative is Fortescue Metals Group (ASX: FMG). However its debt is a concern for me and despite the recent opening of its Firetail project and its expansion plans with Rio, it is likely to take some time to pay down that debt before it can produce the massive profits it has seen in the recent past. I’m not ruling it out, but saying it may well get cheaper.

BHP is in a very similar position to Rio and in hindsight I may have been hasty to purchase the stocks I did. BHP is more diversified, less reliant on iron ore and has a higher market capital, but I like Rio because of its EPS forecasts – expected to rise more than 75% before 2016.

Foolish takeaway

Investors will now likely look to shares and perhaps property instead of term deposits and bonds. Combined with inflation, account fees and income tax you may find yourself losing money before you’ve even earned it by holding your cash in a term deposit. Buying cheap shares in S&P/ASX 200 (ASX: XJO)(^AXJO) stocks will give you dividends and the ‘safety’ of some of Australia’s biggest companies, it might even be the company that holds your term deposit.

The Australian Financial Review agrees that “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get 3 Stocks for the Great Dividend Boom in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto.

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