Iron ore is officially in a bear market, having fallen more than 20 per cent since its recent peak.
It's something that usually would crush the share price of the likes of BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group (ASX: FMG).
Yet, the Fortescue share price has fallen less than 2 per cent over the past month, now trading around $6.
What gives?
It's the valuation, of course.
Fortescue shares trade on a trailing 5.3% fully franked dividend. And its forecast P/E of just 5 times earnings makes Fortescue shares look ridiculously cheap.
I'm not tempted, especially as I've sworn off mining stocks for life… my existing BHP Billiton holding aside.
Just when you think it's all clear to buy mining stocks, they bite you on the bum, either by making a dumb acquisition or ramping up production just before commodity prices come tumbling down again.
So, why do I continue to hold BHP? After all, the BHP share price has soared 57 per cent higher in the last 12 months, now trading around $25.50.
There's a strong case to be made that the easy money has already been made. But that's until you delve into the valuation.
According to Commsec, BHP shares trade on a forecast P/E of 13 times earnings and a forecast fully franked dividend yield of 5.5%. Not cheap. But not expensive either, especially considering the prospective dividend yield.
Unless China blows up… something that would not only crush the share prices of mining stocks, but would also send Australia spinning into recession.
According to an article in today's AFR…
"Modelling by Deloitte Access Economics partner Chris Richardson shows a China crisis would wipe almost $140 billion from Australia's economy, send unemployment up, cut house prices by 9 per cent, and destroy almost $1 trillion of national wealth."
Sounds bad.
Sounds worse when Mr Richardson calls Australian house prices "dangerously dumb," estimating they are about 30 per cent over-valued.
That is, until he says…
"We don't expect China to go down, but if it did, we'd be in the firing line."
In other words, carry on as per usual. Just don't buy an investment property.
Something else you shouldn't be buying is shares in Telstra Corporation Ltd (ASX: TLS).
Its millions of 'mum and dad' shareholders will be feeling battered and bruised today after the Telstra share price tumbled 30 cents to $4.26, taking this year's fall to a whopping 17 per cent.
The catalyst was TPG Telecom Ltd (ASX: TPM) announcing it was entering the mobile phone market, spending $1.9 billion to build its own network, aiming to cover 80 per cent of the population.
It's a bold, high stakes move by TPG. They spend all this money up front, and hope at least 500,000 people sign up to TPG Mobile, even though they'll likely lose mobile coverage when they head outside the major cities. And that 500,000 subscribers only gets TPG Mobile to break-even.
What TPG will lack in coverage, they'll make up for in price, likely slashing the cost of monthly mobile phone plans while simultaneously increasing mobile data allowances, potentially offering unlimited downloads, as many providers do in the US.
Great for consumers. Awful for shareholders.
All of which spells danger for Telstra, and its juicy 7.3% fully franked dividend yield. Competition's a bitch, and Telstra will now be facing in on all fronts.
Telstra aside, this bull market just rumbles on. Not even the threat of a nuclear strike from North Korea, and the very real prospect of President Trump ordering pre-emptive strikes on the rogue state have dented world stock markets.
Still, investors remain nervous. Overnight, the VIX, otherwise know as the fear gauge, touched a five month high.
Gold also jumped to a five month high as investors ran like lemmings to the so-called safe haven asset.
The contrarian in me considers both moves to be buying signals… and I'm not talking about the popular blue chips, many of which look plainly expensive. Woolworths Limited (ASX: WOW) shares trading on a forecast P/E of 21.5 times earnings and a trailing dividend yield of 2.5 per cent? Give me strength.
I'm talking about smaller and mid-cap growth shares, many of which have been forgotten about during the S&P/ASX 200 Index's run to over 5,900.
Unlike Woolworths, Telstra and the banks, many smaller companies are growing like gangbusters. And they pay very attractive, and fast growing fully franked dividends.
Small-caps are often assumed to be more risky, especially when compared to the blue chips.
But in this market, the roles have been reversed.
The value today is in high quality growth stocks. They may be out of favour today, but at the compelling valuations and yields on offer, it won't be for long.
