Rio Tinto Limited and National Australia Bank Ltd: Should you buy?

The share prices of both Rio Tinto Limited (ASX: RIO) and National Australia Bank Ltd (ASX: NAB) have underperformed the S&P/ASX 200 (INDEX^: AXJO) (ASX: XJO) in 2014 and they’re looking cheap.

Not so fast…

In the share market, when things appear too good to be true, they usually are.

Let’s take a quick look and see why they’re so cheap…

Rio Tinto

Rio is the world’s second largest iron ore miner, behind Vale of Brazil, with the steel-making ingredient accounting for over 90% of profits. This type of exposure is great when prices stay high but throughout 2014 the spot price of the ore has fallen 40% and already taken with it a number of Australian iron ore miners.

Whilst Rio’s breakeven cost of just $US43 per tonne (compared to an iron ore price of around $US80 per tonne) creates a healthy operating margin, there’s no doubt it’ll feel the pain of lower prices. Indeed, just this week Brazilian miner Vale reported a $3 billion third quarter loss, as it struggled with lower commodity prices, a falling Brazilian real and a large pile of US-denominated debt.

Although Rio’s debt position is slightly more modest than Vale’s, it is certainly not immune from these risks. Combined with an already low coal and uranium price, there are a number of reasons why Rio trades cheap.

National Australia Bank

NAB has had its fair share of woes over the years and just this week announced a 9.8% fall in cash profit for 2014. This comes at a time when others, such as Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) are posting record profits.

Despite being our biggest bank by assets, NAB’s profitability continues to be a huge concern for investors with it currently boasting the lowest return on equity (ROE) and net interest margin (NIM) of the big banks, coupled with the highest cost to income ratio. This can be put down to the group’s foreign exposure, through its subsidiaries in the UK and US, which continue to weigh on earnings and distract management.

Over the past 15 years, NAB shares are up just 23%. So although the bank’s new CEO Andrew Thorburn appears to be the right man for the job, it would take a brave investor to bet on a turnaround at today’s prices.

Whilst NAB and Rio Tinto could be a risky bet, there's one ASX stock which I think is a GREAT buy today...

It's a company many Australians are already familiar with but just recently our top investment advisor Scott Phillips called it his #1 stock pick for 2015. You can get his full research report on this ultra-promising ASX stock for FREE.

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Motley Fool Contributor Owen Raszkiewicz is long December 2017 $48 warrants in Rio Tinto.     

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