Please ensure Javascript is enabled for purposes of website accessibility

Shares of Glencore plc: Love Them or Leave Them?

By Alex Dumortier, CFA - Sep 29, 2015 at 12:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A possible aggressive value play, shares of Glencore plc have been extremely volatile.

U.S. stocks are posting small gains on Tuesday, with the Dow Jones Industrial Average (^DJI 0.00%) and the S&P 500 (^GSPC -0.81%) up 0.01%, and 0.17%, respectively, at 12 p.m. EDT.

Source: Glencore

Shares of Glencore plc: If you like 'em at $5 per share, you'll love 'em at $2.50. I think that statement holds, but there are plenty of caveats and qualifiers.

This column first mentioned Glencore plc on Aug. 20 as a possible aggressive value play. At the time, the miner-trader's ADRs had lost nearly half their value year to date and were trading at around $5.00.

Yesterday, they closed at $2.07, for a horrifying year-to-date loss of 76% (though the shares are rebounding somewhat today.)

While I would argue that decline is excessive and driven by sentiment rather than fact, just because a company's intrinsic value is generally much less volatile than its stock price does not mean it can't decline substantially over the course of a six weeks. Consider the value of Volkswagen AG today compared to a month ago, for example.

That's particularly true of a company that has a substantial trading operation: The confidence of your counterparties matters in the money-shuffling business.

Back in August, management understood that it had to address the market's loss of confidence forcefully; at the beginning of the month, the company announced a $10 billion program of measures to reduce its net debt by a third. One of them was a $2.5 billion equity capital raising (representing 10% of the company's existing equity) that was completed mid-month.

Manifestly, that hasn't been enough to prevent investors' loss of confidence from compounding, but sentiment may have bottomed yesterday (in the short term at least), as the market (over)reacted to an analyst note from Investec focused on the penalty that Glencore's debt load imposes on shareholders.

One of the authors, Hunter Hillcoat, said yesterday: "If commodity prices don't appreciate, where does that leave shareholders? At current spot prices, all else being the same, Glencore's equity value is zero."

However, it's worth pointing out that the analyst was referring to a scenario in which current spot prices become the norm; furthermore, he believes the shares offer value at their current price. I still do, too, but the risk of a permanent loss of capital has increased, and investors should expect plenty of volatility along the way.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,880.24 (0.00%) $0.00
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,941.48 (-0.81%) $-32.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.