The Motley Fool

Should you buy these resources shares?

Over the last 12 months the resources sector has been one of the best performing areas of the market.

During this time the S&P/ASX 200 Resources (Index: ^AXJR) (ASX: XJR) has made an impressive gain of 33%.

I think this strong gain demonstrates why having a little exposure to the resources sector can be a good thing for portfolios.

With that in mind, are these three resources shares in the buy zone?

Galaxy Resources Limited (ASX: GXY)

I think that Galaxy is the best lithium miner listed on the Australian share market by some distance. Its world class assets include the highly profitable Mt Cattlin operation, the soon to be developed Sal de Vida operation, and the extremely promising James Bay operation in North America. However, as highly as I rate it, I think its shares are about fair value now after a strong recent run. Furthermore, given how high up the lithium miners are on the risk scale, I would only recommend investors buy in when there is a sufficient risk/reward on offer. As such, I would wait for a potential pullback before picking up shares.

Origin Energy Ltd (ASX: ORG)

Whereas this leading energy producer could be trading at a great price for investors today. Not only does Origin have leverage to rising oil prices, it also stands to benefit from improvements in its utility segment. In addition to this, its shares are trading on a much lower EV/EBITDA multiple than industry peers Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL). So, if you’re confident that global economic growth will be strong and support oil prices in the US$60 to US$70 a barrel range, then Origin could be well worth considering.

Rio Tinto Limited (ASX: RIO)

Another great option in the resources sector in my opinion is Rio Tinto. I would rank it the second-best option in the sector behind only BHP Billiton Limited (ASX: BHP). However, an investment in Rio Tinto does rely heavily on the global economy growing at a solid rate. This does mean that its shares could be hit hard if there is a global trade war that threatens to slow down economic growth. But as I’m confident a crisis will be averted, I think Rio Tinto has a good two to three years of growth left in its tank and plenty of dividends to be paid in that time.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. 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 Scott Phillips.

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