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Resource Stocks: A Market More Hated Than Tech Stocks…

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It was a good night overnight for stock investors.

The US S&P 500 gained 0.6%.

Actually, it was a good night for some stock investors. Tech stocks didn’t fare so well.

AOL Inc [NYSE:AOL] fell 20%, Yahoo! Inc [NASDAQ:YHOO] dropped 6.6%, Groupon [NASDAQ:GRPN] lost 21%, and Twitter [NASDAQ:TWTR] fell 3.7% after an 18% drop yesterday.

Who in their right mind would buy tech stocks?

Anyone who’s prepared to look more than two minutes into the future, that’s who…

There are generally two types of investor, the long-term investor and the short-term investor (also known as traders).

Long-term investing doesn’t necessarily mean being a buy-and-hold investor. It just means that you take a long-term view on an investment.

It means that you’re prepared to sit through the short-term ups and downs (mostly downs at the moment) in order to achieve a longer term goal.


Typical ‘bubble’ stock trading for 3.7 times earnings


Many stock bears will be wringing their hands in glee at the moment. The NASDAQ Composite index has fallen 6.7% in two months.

That’s a big old drop.

But when you consider that the index is still up 20.4% over the past year, even with the recent drop, it’s fair to say the market isn’t in as bad shape as the headlines suggest.

What you’re seeing in tech stocks right now is the typical price action that you get after any strong run.

As an investor, you never want to see stocks tumble like this. And it’s also pretty hard to figure out when it will happen. The important thing is to figure out if the market is right to sell off the stocks or whether it has gone too far.

That goes for all market sectors, not just tech stocks.

So, is the tech sell-off overdone? Our bet is that it is. Even the internet giant Google [NASDAQ:GOOG] is down 16.3% in two months. And with a price to earnings (PE) ratio of 27, you could hardly say that’s expensive compared to many other tech stocks.

And even a stock that most investors would consider to be emblematic of an internet stock bubble — King Digital Entertainment [NYSE:KING] — is only trading at a paltry 3.7-times earnings.

That’s not the kind of stock valuation you would normally expect for a speculative tech stock.


The market still hates resource stocks more than tech stocks


But it’s not just the tech sector that has taken a pasting.

Perhaps the market that has sold off the most, and the one most relevant to Aussie investors, is the resources market.

You only have to look at the following five-year chart that compares the resource sector to the NASDAQ Composite index:

Source: Google Finance
Click to enlarge


The blue line is the NASDAQ. The red line is the S&P/ASX 300 Metals & Mining index. Over the past five years the NASDAQ has gained 133% while the metals and mining index has fallen 11.4%.

Resource stocks have sold off for a different reason to tech stocks. Tech stocks tend to have high valuations due to the expectations of rapid growth. Whenever the market feels that growth may not happen it can cause a big correction in tech stock prices.

You’ve seen that happen in recent weeks.

By contrast, mining stocks have taken a beating for another reason…or rather two reasons. The first is that for some unknown reason investors think the Chinese economy is about to slam on the brakes.

They’re worried that China’s demand for raw materials will drop and this will have a negative impact on resource stocks. The other reason is that a big factor for resource stocks is financing.

After the 2008 meltdown it has become harder and harder for resource companies to get the same kind of financing as before. Big banks and institutions just aren’t prepared to put money into projects that don’t have a 100% guarantee of success.

It means that Aussie resource companies either can’t get financing or they have to issue new stock to pay for projects. This tends to have a negative impact on the company’s share price.

But despite the negative headlines, we still see the sell-off in resources and tech stocks as an opportunity.


Still a great time to speculate


After all, these aren’t the opportunities that you would invest all your money in.

These are ‘punting’ stock opportunities. The bulk of your stock portfolio should be in blue-chip stocks where you’re earning dividends and getting stable capital growth.

Resource and tech stocks are for the 5%, 10% or 15% of your stock portfolio that you’re using for higher growth (and higher risk) opportunities.

We’ve seen this kind of price action before for tech stocks over the past five years. At some point over the coming weeks investors will realise they’ve over-reacted.

As for the resource sector… The continued negative view on resource stocks has us stumped. It’s as though the market thinks China (and everyone else) will never demand resources again.

And yet, the US state of Texas is reaching record production levels. It’s currently producing 2.7 million barrels of oil per day. Somebody is consuming that oil. And over the coming years, despite the talk of the world economy becoming less reliant on fossil fuels, it’s more likely than not that oil production and consumption will increase further.

Tech stocks down. Resources stocks down.

In our view, that’s a great opportunity for Aussie investors to buy into two of the most exciting sectors on the market.

Read the rest of this article at Money Morning


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