by Stephen Leeb, editor The Complete Investor
BHP Billiton (BHP)
isn't just for investors seeking income, though its 3 percent yield is
certainly a lure. We think the shares will strongly outperform the
market in 2013, propelled by rising commodity prices.
it a stock all investors should consider to supplement their stake in
the commodities area. In our view, the stock is at the starting gate of a
major new uptrend.
Based in Australia, BHP by a wide margin is the world's largest
commodity producer, with production and/or assets in everything from
iron ore—its biggest revenue generator—to oil, coal (it's a major
supplier to China), silver, and a wide variety of base metals.
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look at the company's trajectory over the past dozen years explains why
we think the stock is such a strong bet. At the 21st century's start,
very few analysts (we were among the exceptions) thought commodity
prices were in a long-term uptrend.
So anticipating slowing
demand, BHP, along with other major commodity producers, trimmed back on
plans for capital spending and kept a tight rein on costs. But lo and
behold, the uptrend in commodities continued.
upshot was burgeoning margins for BHP, an eightfold growth in profits
between 2002 and 2007, and soaring gains in its share price that
surpassed gains in the underlying commodities.
reversed after 2007. BHP had begun implementing new capital spending
programs just as the global economy was hit by the financial crisis (the
inevitable lag between planning and implementation explains the
timing), and the shares started to underperform.
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In the years
since then, however, the company has once again slashed capital spending
in reaction to the global economic weakness and the widespread belief
that demand for resources would remain tepid.
Once again, we beg
to disagree with the prevailing view of commodities, believing China's
ongoing appetite for resources will underpin robust demand. Worth noting
is that PetroChina recently announced plans to purchase assets from BHP
at premium prices.
This not only will add to BHP's net asset
value but also is a further indication that China's demand for resources
will continue to expand. Also suggestive, BHP's P/E today based on 2013
earnings is comparable to its P/E prior to earlier commodity runs.
sum up: we look for strong profit growth for this commodities
powerhouse and a rising share price that outpaces the overall market.
This outlook coupled with BHP's attractive yield makes the stock a safe
and reliable way to play the resumption we foresee in the commodities