Are these sold-off mining stocks too cheap to miss?

Take advantage of daily share price movement by focusing on company performance.

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By following stocks for some time, you become familiar with how they grow and their business rhythm. In between reporting seasons the market has less information to act upon, so share prices drift up and down.  Even after a good half-year result, investors and traders may discount the advances and become worried that the next half may not be as good.

Their sole gauge is the share price – is it up or down? Long-term investors know that it is the company that drives the earnings in the end. Developing a sense of a company’s per share value then releases you from selling a favoured stock when it is down if you don’t want to. You may even look forward to a market sell-off to take stocks down to bargain levels.

So when I see a company like Fortescue Metals Group Limited (ASX: FMG) hitting its production targets, raising earnings and paying down debt with all the money it’s generating, the fall in share price since February indicates the market is still anxious over the stock.

The share price fell just after the results announcement and the market has not moved on for a while. It is at a 6.1 PE and its $5.39 share price gives it a dividend yield of 2.7%. Coupled with a strong half year, these can be selling dips to take advantage of. The growth story is there.

Rio Tinto Limited (ASX: RIO) is similar. Moving towards its goal of producing 360 million tonnes per annum (mtpa) of iron ore, it expects to hit an annual production rate of 290 mtpa before the end of the first half of 2014.

Coal has been a disappointment with lower spot prices. Yet the company talks of the long range demand for coal. This is a period of adjustment for the company, when it will cut out costs, sell off some assets and improve performance.

While the share price still reflects the concerns of the market, the business value is growing. That’s why long-term investors don’t fear market corrections. When the company is becoming lean and producing more, the price will come to reflect that more.

Foolish takeaway

Iron ore prices are up a bit in the past week, following a slight decline. The overall movement is small. Instead of following the commodity price day by day, it is better to focus on the two companies’ cost bases and watch how they are widening profit margins.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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