I have just sold high-performing Glencore (LSE: GLEN), the Swiss miner and commodity marketer. Make no mistake, this is not a sale made in disappointment. This FTSE 100 stock has been one of the best performers in my portfolio. I bought it around the time of the stock market crash last year, when it was trading at pretty abysmal levels. But over the past year the stock has been on a roll.
Limited upside to Glencore shares
So why have I sold now? It is because I am not convinced there is much more upside to it in the foreseeable future. The past couple of years have been atypical for stock markets, to say the least. Just consider industrial commodity miners. They saw an unexpected windfall in 2020 and well into 2021 because of the heavy (and sometimes profligate) government spending aimed at encouraging growth in the economy during the pandemic. As a result their share prices ran-up even while other FTSE 100 stocks fumbled and fell.
Pricey compared to peers
However, with spending now being wound down, forecasts for commodity prices have been cut. This is likely to impact Glencore, which has been a beneficiary of the trend. And that, in turn, could quite likely impact its stock price. This is especially so considering that the company trades at an elevated price-to-earnings (P/E) ratio of 36 times at present. This is significantly higher than the 18 times at which the average FTSE 100 stock trades. It is even higher than its FTSE 100 peers’ market valuations. Anglo American, for instance, has a P/E of 7.8 times and Rio Tinto trades even lower at 5.9 times. As a result, not only does Glencore look overvalued to me in comparison to the index, it also looks hugely overvalued compared to its peers.
As a top-down investor, I like to consider sectors first and then drill down to individual stocks. From that perspective, it was becoming increasingly clear that it would be beneficial for me to reallocate my funds towards Glencore’s undervalued peers instead. Moreover, the miner is a cyclical stock, that has now risen to multi-year highs. Going by this, and the muted outlook for commodities, it seems to me that the stock is more likely to fall than rise further in 2022.
Further, its dividend yield is nowhere near to that for its FTSE 100 peers. At 2.2%, it is a fraction of the 10%+ yields offered by Evraz and Rio Tinto. It is also less than half of that for Anglo American at 5.6%.
What happens next
There is some upside to the stock though. Analysts, on average, expect that its share price will rise by 8% in the next 12 months, which is far more than the 3% to 4% increase expected for other FTSE 100 miners. It is also possible that its share price continues to rise at an even faster clip if the economy picks up speed, increasing demand for commodities again.
But we really do not know if any of this will happen. I typically like to stay invested in stocks for a longer time period, but I made an exception in this case. I would only buy Glencore shares on a serious dip now.
Manika Premsingh owns shares in Anglo American, Evraz and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
