Beware cheap buys

Published in the Daily Telegraph, July 2015

Is now the time to start buying up commodity-related stocks, or is it still buyer beware?

With commodities, and most commodity related stocks, in a slump for years, some market commentators are telling investors that it’s time to buy‘‘cheap’’ for the long term, but this doesn’t make it right.

It is true that commodities like gold, iron ore, oil, and copper have all been trading in long-term declines, and therefore so have the majority of commodity-related companies.

To paint you the bigger picture view, following the high in 2011, copper is down by about 47 per cent, gold 42 per cent, oil 56 per cent, and iron ore 72 per cent.

This means many of the associated companies are making considerably less.

So ask yourself, why would their share prices rise?

What we need to see before buying is strong confirmation that all commodities are rising, and right now the charts don’t indicate this to be the case.

Smart investors know that share prices rise on the prospect of higher earnings growth; requiring rising demand, higher prices, or for the company to increase their market share, as well as innovation and cost reduction.

The market is always looking for good growth prospects at least six months out, and many companies in this space do not tick that box.

The reality is that without a real prospect for growth a share price will struggle, and is more likely to fall.

You also don’t try to pick the lows, instead you leave the false starts for the short-term speculators who are planning to exit a few weeks after the rise starts.

My price charts indicate that commodities may be close to at least a short-term low, however, there is still the very real prospect of further falls into 2016.

Therefore, for most investors, buying these stocks now means you are taking a big risk.

This is particularly important, as many investors don’t have the knowledge to properly understand risk and how to manage it.

The reality is that if you haven’t been educated you may not know how to properly set stop- losses to limit your risk, or how to determine when risk is too high to buy, and too high to hold.

The cost to you could end up being that gains made from quality stocks in your portfolio that have been rising, are eroded.

What annoys me is that some commentators make statements without explaining to you what the risks are.

Now is the time when short-term speculators will be trying to pick a low in commodities.

They also want to create interest from investors to help support the rise, so be very cautious.

My price charts show plenty of short-term rises that catch investors out when stocks are falling long term.

Further, if the opportunity to buy commodity stocks was such a great idea why isn’t the big end of town already buying in droves?

And, if big money is flowing into a stock, you will see the price rise over a number of months, not just a few days or weeks.

So, why put your cash at risk and invest in stocks when those in-the-know are not strongly behind them?

Be patient, there will be safer opportunities to buy commodity-related stocks, after we see strong confirmation that the current commodities slide has been arrested.

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