Is it time to switch into resources stocks?

Credit: iStock

If your portfolio held a number of Australia’s largest resources companies over the past six months, it would’ve done very well.

Since late February, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up a decent 10.3%, but a portfolio comprised of equal holdings in BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Newcrest Mining Limited (ASX: NCM), South32 Ltd (ASX: S32), Fortescue Metals Group Limited (ASX: FMG) and Whitehaven Coal Limited (ASX: WHC) would be up on average a whopping 96%.

Company Return
BHP Billiton Limited (ASX: BHP) 25%
South32 Ltd (ASX: S32) 70%
Rio Tinto Limited (ASX: RIO) 18%
Fortescue Metals Group Limited (ASX: FMG) 125%
Newcrest Mining Limited (ASX: NCM) 48%
Whitehaven Coal Ltd (ASX: WHC) 291%
Average return 96%

Source: S&P Global Market intelligence

Believe it or not, Rio is the laggard in that group, up just 17.8% – but still well ahead of the S&P/ASX 200 Index.

But for those investors with large holdings in the big four banks, CSL Limited (ASX: CSL), Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS), the returns aren’t that great.

The average return is just 6.3%, and only one company, ANZ has posted a gain of more than the index over that period.

Company Return
CSL Limited (ASX: CSL) 6.2%
Telstra Corporation Ltd (ASX: TLS) 6.2%
Wesfarmers Ltd (ASX: WES) 0.3%
Woolworths Limited (ASX: WOW) 5.9%
Australia and New Zealand Banking Group (ASX: ANZ) 17.5%
Commonwealth Bank of Australia (ASX: CBA) 1.8%
National Australia Bank Ltd. (ASX: NAB) 10.0%
Westpac Banking Corp (ASX: WBC) 2.6%
Average Return 6.3%

Source: S&P Global Market intelligence

Go back five years and the results are quite different though, with the resources companies down 26% on average, and the banks and industrial stocks are up on average by 114% – although the index is up 31% since August 2011, according to S&P Global Market Intelligence.

But with some signs that commodity prices may have hit bottom, while others are turning, that could be good news for the resources sector. While the past few years haven’t been kind to them, it has at least forced the miners to absolutely slash their expenses and overhead costs back to a much more efficient rate. If commodity prices continue to recover, that should mean an incremental increase in revenues due to leverage.

Foolish takeaway

However, investors should note that the dismal five-year returns by the resources companies offer a hint to the risks that investors are taking investing in that sector.

If you think you might be able to time the sale of those stocks before they start falling again, you might want to ask yourself why your portfolio didn’t consist of just those 6 resources companies six months ago.


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Motley Fool writer/analyst Mike King owns shares in Telstra Corporation, Woolworths, Wesfarmers Ltd and CSL Limited. You can follow Mike on Twitter @TMFKinga

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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