Many investors avoid resource stocks because there is a perception that this sector is very volatile. However, large cap resource stocks usually do not suffer massive one day losses. When you look at how much they can fall in a given day, you will be surprised to see how they compare to other sectors of the market.

This is distinct from other companies on the ASX which can suffer massive falls of 10-50% in one day if they release a half year or full year result that is under market expectations.

Although the materials sector is a volatile sector at times, the sector has also been a great performer at the right part of the economic cycle. As at 30 June 2018 the materials sector outperformed the ASX 200. It had a 25.2% gain while the ASX 200 only generated a return of 8.27%.  Materials also delivered a strong performance the year before (as of 30 June 2017) with the material sector returning 22.10% percent while the ASX 200 only returned 9.33%. The financial sector underperformed by returning -3.85% and the telecommunications sector grossly underperformed with a return of -34.98% in FY 2018. These two sectors have been traditionally considered as safe and are commonly held in investors’ portfolios.

The key to trading mining stocks is to know when to buy them. Stocks in the materials sector perform the best in the late cycle. This is because material stocks are closely correlated to raw material prices. Economic expansion in the late cycle can create the increased demand for these raw materials.

Although resource stocks can be volatile and may have some large share price drops over time, these stocks do recover and can continue to increase. This is unlike some other blue-chip stocks which drop and never fully recover from their share price decline.

If we look at the prices for RIO and BHP for the past 5 years, you may be surprised to learn that the largest one day drop for BHP was -8.22% in 2015 and -7.53% for Rio in 2016.

So if a mining stock does move against the investor, they still have time to sell out of their position before a massive amount of capital is eroded. In comparison, there are other stocks which have had very large one day falls so the investor would not have time to exit the position before taking a substantial loss on their capital.

Some recent examples of large one day drops are :

Blackmores (ASX:BKL) fell -24.85% on 18/2/2019,  BWX Ltd (ASX:BWX) dropped -46.69% on 19/12/2018 and Bingo (ASX:BIN) fell -46.58% on 17/2/2019.

Let’s look at it in some more detail.

In the example of BHP below, the share price of hit a low of $14.06 back in 22/1/2016. However, the share price has since recovered with the current price of $37.94 which is close to the 52 week high of $38.20.

 

You can also see the share price recovery on RIO where on the chart we can see RIO hit a low of $36.53 on the 29/2/2016 but the stock has continued to climb to a price of $94.88.

 

With Fortescue Metals (ASX:FMG) it hit a low 1.44 on 20/1/2016 but with it has recovered to almost the 2017 high of $7.27 with the current price of $6.49.

There are some blue chip stocks which have the perception of being safer stocks have still not fully recovered from price declines. Let’s look at Telstra (ASX:TLS) which has been traditionally been brought as a dividend stock. The stock was trading at $5.85 on 29/7/2016 and in the two years the stock still has not bounced back with the current share price of $3.19. Even with the high dividend yield of 6.27%, it still does not make up for the capital loss from holding this stock.

 

Dominos Pizza (ASX:DMP) used to be the market darling when the share price kept going up and looked like it was a strong performer. It hit a high of $80.69 on 19/8/2016 but it has since struggle to regain those stock levels. After two years the stock is still nowhere near those high as it is trading at $42.19.

Blackmores (ASX:BKL) was another stock that was running strong trading at $220.90 on 8/1/2016. The stock still has not been able to reach these levels after two years with the current price around hovering around $95.20.

To conclude, investors should re-evaluate their perception of resource stock and note the price recovery of mining stocks compared to other stocks which have been perceived as safe but have still not fully bounced back after 3 years.

Holding a mining stock is not as volatile as many perceive. The big mining stocks do not tend of suffer very large one-day falls and this therefore gives investors a better chance to get out compared to other stocks on the market.

 

Lauren Hua is a private client adviser at Fairmont Equities.

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