Since the election, news of the doomed mining, resources and services industry has subsided. The Reserve Bank has shifted its focus to the banks, property and non-mining sectors of the economy.
As many faithful mining investors will know, the past nine months have been tough. For the media and politicians, it was an opportunity to insight fear into the Australian voters but, perhaps inadvertently, it brought down mining company stock prices to unforgiving levels.
In May, I said it would be a shame to miss out on some great opportunities that presented themselves as a result of all the negative publicity. When a good company does not change in any way but the share price drops, investors should take the opportunity to grab a bargain because only ‘noise’ is lowering share prices.
Iron ore miners Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) never reached a price that would be considered a standout buy. Despite increasing some 20% and 65%, respectively, since the start of July I believed they remained laden with debt and extraneous assets that would continue to drag down profits. Rio still faces these problems and if iron prices drop, it’ll be severely overpriced.
Investors should have used the ‘noise’ to start searching for companies with good balance sheets and view for long term growth. Two such examples are BC Iron (ASX: BCI) and Ausdrill (ASX: ASL). Over the same period as Rio and Fortescue, their share prices grew 43% and 107% respectively and both paid dividends over 10% when grossed-up with franking credits.
More importantly, they’ve still got room for growth and pay dividends (based on FY13 returns) of 8.9% and 6.9%, respectively, before franking credits. They eat Rio and Fortescue’s dividends of 2.6% and 2.3% for breakfast.
Smart investors will, when the opportunity presents itself, do things contrary to the media and other investors in a bid to find undervalued stocks. They find good companies at the best prices knowing they’ll work through the ‘noise’ and continue to return to shareholders. So next time your unable to find something to invest in, look next to the trash cans and you might find treasure. The famous words of Warren Buffett ring loud and clear when looking for such opportunities, “be fearful when others are greedy and greedy when others are fearful.”
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Motley Fool contributor Owen Raskiewicz owns shares in Ausdrill.