BHP Billiton Limited (ASX: BHP) has taken its shareholders on a wild ride over the last 12 months, with the stock becoming particularly volatile in recent weeks. Indeed, the shares are trading 1.4% lower today at $27.82 and look to be headed even further south.
Although it might seem attractive at today's price, here are three key reasons you should avoid buying BHP Billiton's shares…
- Iron Ore is, by far, the miner's most important commodity. Although it has surged more than 40% since hitting a decade-low price back in April, the fundamentals for the iron ore market remain unchanged – supply growth will continue to outpace demand growth, which will have a negative effect on the commodity's price. Another decline in iron ore prices would be terrible news for BHP Billiton's overall earnings.
- The Fairfax press reported that stockpiles of copper had skyrocketed by 90% over the last year, which coincides with a falling level of demand from China, the world's top consumer. The price of the commodity, which is another major contributor to BHP's earnings, has dropped 12% in the last year and is expected to continue falling which would further impact the company's performance moving forward.
- One of the reasons behind its recent demerger of South32 Ltd (ASX: S32) was to provide investors with the choice of which assets they wanted exposure to – BHP's 'core' assets or those that it had for so long considered as 'unwanted'. Looking ahead, South32 is arguably the better investment at its current price of $2.10 and has the potential to generate significantly better returns as management reins in costs and overall productivity.
Now that BHP has spun-off its non-core assets, it can focus more on driving costs lower and improving the efficiencies in its core business lines. But with commodity prices tipped to fall considerably over the coming years, those initiatives may not be enough to prop up the miner's earnings. As such, BHP is a stock for 'Foolish' investors to avoid, for now.
