Foolish (capital 'F') investors know that one of the best times to buy a high-quality company is when its shares have been beaten down. But it is equally important for them to know when those opportunities should be avoided.
While a falling share price can sometimes be the result of investors taking their profits or focusing on the company's short-term rather than its long-term prospects, it can also be a sign of worse things to come.
In the case of BHP Billiton Limited (ASX: BHP), right now it appears to be the latter. Over the last seven weeks or so, the stock has retreated nearly 13% – heavily underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in that time – to be trading at just $29.97. While some investors will see that as an opportunity, others will recognise the dangers of investing in the Big Australian today.
Here are five reasons why BHP Billiton shares could still be a risk to your wealth…
- The price of iron ore has been a key reason behind the stock's fall recently. The commodity has lost almost 29% of its value since the beginning of the year and by all accounts looks set to retreat even further. Given that iron ore is BHP's most important commodity, further falls will certainly have a negative impact on the miner's profits.
- Despite the warning signs that iron ore could fall below US$40 a tonne (from almost US$51 a tonne today, according to the Metal Bulletin), BHP and fellow iron ore giant Rio Tinto Limited (ASX: RIO) continue to pursue their lofty expansion targets. As their output rises, it will only apply further pressure to the iron ore price, thus reducing their margins and overall profitability.
- Oil prices are another key worry for BHP Billiton. Oil is BHP's second-most important commodity and, although prices have rebounded recently, there are still fears it could fall considerably in value. As is the case for iron ore, there is an enormous imbalance between supply and demand in the global marketplace, forcing prices lower.
- Like all other miners, BHP Billiton relies on high commodity prices for profit growth. Lower commodity prices could have a huge impact on BHP's cash flows which could impact its ability to uphold its progressive dividend policy. If investors sense that their dividends could be under threat, you can expect them to react swiftly and head for the exits en masse.
- Although BHP Billiton might look attractive below $30 per share, investors need to realise there are better opportunities currently presenting themselves which offer potentially greater rewards and less risk.
