Can the BHP Billiton Limited share price hit $20 in 2016?

The share price of BHP Billiton Limited (ASX: BHP) soared higher on Wednesday, recovering 5.6% following its sharp selloff recently.

Indeed, BHP Billiton has been one of the local share market’s worst performing blue chip shares in the 2015 calendar year, and many investors were likely hoping that yesterday’s relief rally resembled the start of the miner’s resurgence.

Unfortunately, the shares have failed to back-up yesterday’s efforts today, falling 0.5% compared to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 1.8% gain. Pleasingly, they’ve stayed above the $17 per share mark at least, and not fallen back towards their 10-year low of $16.25 hit earlier this week. In the big scheme of things, it’s not a major improvement but it is a step in the right direction.

Needless to say though, shareholders of BHP who have remained patient over the last 12 months will certainly be hoping for a much better performance in 2016.

Can BHP’s share price hit $20 in 2016?

BHP Billiton’s shares were trading for more than $20 each as recently as last month, but have since fallen almost 15% on the back of falling commodity prices. As Philip Baker, columnist for The Australian Financial Review also suggested recently, there’s a chance capitulation may have played a role in the collapse of the miner’s share price.

Capitulation is often associated with ‘panic selling’ and can occur when investors begin to act irrationally in selling their shares. For instance, they may choose to sell out of a share at any price simply to avoid the pain of any further losses.

Now, that may have happened with BHP Billiton and the shares may have finally found a floor just above $16 per share. In that case, the miner’s share price could certainly go on to surpass $20 a share in 2016.

In saying that however, there is a risk that BHP Billiton’s share price could continue to underperform – particularly if iron ore and oil prices continue to lag. Indeed, these are BHP’s two most important commodities and account for a large portion of its overall earnings. Both are languishing below US$40 (per tonne, for iron ore; per barrel for oil) and, according to some economists, will continue to decline into 2016.

Should that happen, it’s difficult to tell where BHP’s shares will go next. It’s also difficult to establish whether or not BHP’s so-called ‘progressive dividend policy’ is actually sustainable, which could also impact overall shareholder returns.

Should you buy?

I think most investors will have at least looked at BHP Billiton’s shares at some point over the last 12 months and thought about buying. In recent weeks, they may have been even more tempted with the shares sitting at their lowest levels since 2005.

While BHP could be a decent buy today however, there’s also the risk the shares could fall even further than their current level – particularly if commodity prices do continue to drop or if Chinese growth rates fall any further. Given that prevalent risk, I’m not willing to make a bet on BHP Billiton’s shares just yet.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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