Throughout 2014, National Australia Bank Ltd. (ASX: NAB) and Rio Tinto Limited (ASX: RIO) have continued to underperform the market.
Whilst the broader S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) is up 2.6%, Rio and NAB are down 15.5% and 8%, respectively.
Unfortunately their lacklustre returns are nothing new for shareholders and over the past five years their share prices have failed to outperform the market.
But is 2015 set to be yet another year of underperformance? Or are these two heavyweights now cheap enough to go on and make a worthwhile investment?
Here's what you need to know.
Rio is facing intense headwinds in the form of a falling iron ore price, a commodity which makes up over 90% of earnings. Whilst it's not going to go bust under the current spot price (around $US70 per tonne), Rio is facing the prospect of further declines in revenue throughout 2015. This as demand wanes and supply from competitors pushes the market into a surplus. Whilst its copper and aluminium divisions might provide some relief in 2015, their gains will not be enough to offset the weakening of iron ore. As such, its share price may fall further.
NAB's underperformance can be put down to its UK exposure, which includes two banks, Clydesdale and Yorkshire. In October, NAB was forced to take $1.5 billion of write-offs, stemming mostly from its UK assets. It also has a few billion dollars in bad debts as a result of its exposure to UK commercial property.
However NAB's new CEO Andrew Thorburn has already taken steps which could be game changers over the long term. He's overseen the IPO of the bank's US subsidiary, Great Western Bancorp, and is rumoured to be mulling over the decision to divest Clydesdale and Yorkshire through public markets.
Buy, Hold, or Sell?
Rio is facing the prospect of a much lower iron ore price in 2015 and beyond, so investors may want to keep their distance. And given NAB's accident-prone history and current high share price, it isn't in the buy zone either. However with a big dividend and potential for a turnaround it's worth keeping an eye on.
