Macquarie says it’s time to back resource stocks

After a heavy sell off, should you consider buying mining stocks?

a woman

Investment bank Macquarie Group (ASX: MQG) is reported by The Australian to have forecast the resource sector to outperform the wider S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and generate a total shareholder return of 16.6% relative to a 12.6% return from the index over the next 12 months to September 2014.

Growing investor confidence in the resource sector would appear to be reasonably widespread. According to a recent Research Report by broking house Wilson HTM (ASX: WIG) there has been a “sharp decrease in short positions in the resources sector” over the past few weeks with shorting levels back to two-year lows. This fact suggests short sellers see limited downside at current prices within the resource sector.

Likewise the rally in certain resource stocks over the past few months has been dramatic. Iron ore miner Fortescue Metals (ASX: FMG) has rallied 34% and Rio Tinto (ASX: RIO) is up 18% since June. While the iron ore and diversified miners have enjoyed some broad based support, one sector to have been left behind is gold miners. Although up from its $9.07 low reached in June, over the past three months Newcrest Mining (ASX: NCM) has gained just 6.4%, which means it has underperformed the S&P/ASX 200 Index’s 9.8% return.

The election of a Coalition government also provides a boost for the resource sector. The expected repeal of the mining tax and carbon tax coupled with a mandate to increase infrastructure spending should all help create a positive investment environment for mining stocks going forward.

Foolish takeaway

The near-term rally in a number of mining stocks hides the fact that the sector has significantly underperformed calendar year to date. Potential opportunities within the gold mining sector and the broader mining sector are likely to still be there and awaiting investors prepared to sift through the dirt to find a few hidden gems.

Undervalued resource stocks could provide exciting returns for investors however they don’t have a good history when it comes to dividends. Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur owns shares in Macquarie Group and Wilson HTM.

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