With the resources sector going through a challenging period, it's little wonder that many Aussie investors are feeling nervous about the prospects for stocks operating in that industry. After all, commodity prices are showing little sign of improving and it would be of little surprise for them to fall further. This would clearly hurt the bottom lines of all companies in the sector and could cause considerable share price falls in the short run.
However, for longer-term investors, the present woes of the resources sector could present an opportunity to buy quality companies at relatively low prices. The question, though, is whether the current prices are low enough so as to offer significant upside and manageable downside.
With that in mind, here are three resources stocks that could be worth buying right now for long-term investors.
Santos Ltd
Oil and gas company, Santos Ltd (ASX: STO), has seen its share price collapse by 42% in the last year, as investors have become increasingly concerned about the company's near-term outlook. In fact, Santos is forecast to post a 50% fall in its bottom line this year, which puts it on a forward price to earnings (P/E) ratio of 28.6, which is clearly rich while the ASX has a P/E ratio of 16.6.
However, next year is set to see Santos return to a much higher level of profitability, with earnings growth of 85% being forecast for financial year 2016. This puts it on a forward P/E ratio (using 2016 forecast earnings) of 15.4, while Santos has a price to book (P/B) ratio of just 0.81. As such, and while a weaker Aussie dollar will make debt repayments more difficult (Santos has a considerable amount of US denominated debt), the current margin of safety seems to be wide enough to invest.
Fortescue Metals Group Limited
While an iron ore price at a ten-year low is undoubtedly hurting Fortescue Metals Group Limited (ASX: FMG), it is doing all of the right things to try and turn its fortunes around. For example, significant job cuts are anticipated, with those keeping their jobs set to be asked to work more hours for the same pay.
And, while Fortescue is forecast to see its earnings per share fall from $0.93 last year to just $0.02 next year, the company's current P/B ratio of 0.72 appears to price in further problems, with asset write downs likely unless the iron ore price surges in the months ahead. Furthermore, with Chinese macroeconomic data being somewhat disappointing recently, a stimulus package could lead to increased demand for (and a higher price of) iron ore in the medium to long term.
Newcrest Mining Limited
Even though earnings are set to fall at gold miner Newcrest Mining Limited (ASX: NCM) in the current year, investor sentiment has picked up strongly in 2015 and pushed the company's share price higher by 31% year-to-date. That's at least partly because investors are looking ahead to next year, when Newcrest is forecast to increase its bottom line by 56%.
Such a strong growth rate puts Newcrest on a price to earnings growth (PEG) ratio of just 0.5, which compares favourably to the ASX's PEG ratio of 2.4 and also to the wider mining sector's PEG ratio of 1.3. And, with the outlook for the gold price being much more stable than for other commodities, the risk/reward ratio looks favourable for Newcrest right now.
