Why it’s not time to buy resource stocks

Bell Potter’s Richard Coppleson has told readers of his daily newsletter that it’s time to buy resources.

According to Coppleson (Coppo), the yield trade has peaked and will deflate, and as it does resources will be one of the big beneficiaries.

As most readers are probably aware, ASX-listed gold stocks have been amongst the best-performing stocks year-to-date.

Iron ore stocks have also benefitted immensely from a recovery in the commodity price – Fortescue Metals Group Limited (ASX: FMG) has seen its share price triple since the start of the year to trade at $5.86 currently.

BHP Billiton Limited (ASX: BHP) has also benefitted from a recovery in oil and copper prices, and its share price is up 34% YTD. Rio Tinto Limited (ASX: RIO) – which is more heavily dependent on iron ore – has seen its shares up 27%.

Coal miner Whitehaven Coal Ltd (ASX: WHC) has seen its share price soar a whopping 295% since January 4.

According to “Coppo’s” reasoning, institutional investors are only just reweighting their holdings in resource stocks. He also reports that offshore institutional investors are seeing cash flowing into resource related and cyclical funds from European and UK retail investors, and they will continue to buy resources over time he says.

So investors are going to move out of yield plays like Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD) and Telstra Corporation Ltd (ASX: TLS), and buy into the large resource stocks like BHP and Rio apparently.

There’s a small problem with that.

Resources companies’ earnings are driven by commodity prices. And share prices are mostly driven by earnings over the long-term.

Iron ore prices have hit a brick wall and are tumbling; oil prices are near three-month lows, and market commentators are predicting the copper rally has been overdone.

Institutional investors may well be turning to resources stocks as an alternative to yield plays, but that’s not a strategy that I’d recommend if you want to build long-term wealth – especially with commodity prices crumbling.

Foolish takeaway

Let the institutional investors throw away their cash switching into resource companies. They’ll soon sell out if earnings are falling.

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Motley Fool writer/analyst Mike King owns shares in Sydney Airport Holdings. 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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