Compania de Minas Buenaventura SA (ADR) (NYSE:BVN) has always traded at a discount over ten-years relative to its historical net income growth. The reasoning was because the company was exposed to the price of gold. Gold and silver mine operators tend to be leveraged. When the price of a commodity reaches above break-even, each additional price increase has a significant impact on the net income of the company (the borrowing heavily impacts the performance).
Over the past ten-years, the company’s low price-to-earnings multiple was due to the risk associated with gold prices. What it means is that value investments in basic materials cannot be taken seriously. Analysts on a consensus basis expect this company to grow earnings by 6.6% per-year over the next five years. Falling rates of growth are a bad sign (the company averaged 20% growth in the past ten-years).
The winner
Statoil ASA(ADR) (NYSE:STO)’s performance metrics were the most consistent. Following the 2009 market crash the stock has not been able to fully recover. However, the reasoning for this can be reasonably explained as the company is based out of Norway. For all of you who are unfamiliar with Europe, Europe has been a disaster economic zone. Economic instability tends to depress stock prices, so the low price-to-earnings multiple can be justified.
Analysts expect Statoil ASA(ADR) (NYSE:STO) to report a 14.5% year-over-year decline in net income for the year. The company is expected to grow earnings by 0.4% in the next fiscal year. The decline in earnings growth is coming from falling production growth and Norwegian petroleum taxes. On the upside, Statoil pays a 5.25% dividend yield. The company also provides guidance that production volume should grow at a 2% to 3% compound annual growth rate until 2016.
Over the past 20 years, the price of Brent crude oil has increased by 500%. Assuming the production growth is accompanied by reasonable increases in the price of crude, Statoil ASA(ADR) (NYSE:STO) should be able to outperform.
Conclusion
Buying stocks that always trade at a value is difficult. What investors should look for is a very temporary difference in price relative to performance. Owning stocks that have a higher price-to-earnings multiple and lower rates of earnings growth can be seen as appropriate. The reasoning is that low price-to-earnings doesn’t always indicate a strong investment opportunity, even if the company has always been at a discount and generated net income growth consistently over ten-years.
Of the three opportunities, I closely examined. I believe that Statoil ASA(ADR) (NYSE:STO) has the most upside. The practicality of owning an oil play that trades at consistently low valuations seems pretty smart. The long-term growth thesis largely remains intact despite the short-term weaknesses due to taxation.
The article Value Investing Is Simple: Wrong! originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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