The BHP Billiton Limited (ASX: BHP) share price has come back to earth over the past three months.
But it's not just BHP shares…
BHP share price
As can be seen in the chart above, the BHP share price has fallen around 10% in three months. Meanwhile, Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) shares are down around 11% and 24%, respectively.
What's going with BHP?
Over the past year, BHP shares staged a miraculous recovery as the markets for its key commodities, like iron ore, coal, copper and oil, shrugged off concerns of global oversupply and a Chinese slowdown to rally higher.
But now, those fears have returned. Iron ore and oil, in particular, have come under more pressure in recent months, so down goes the BHP share price.
3 reasons I'm avoiding BHP shares in 2017
I'll be the first to admit I missed the 50% rally in BHP shares in 2016. However, I will be avoiding BHP shares in 2017 for the following reasons.
- A history of mediocre performance. 15 years ago to today, BHP shares have risen 63%. That's ok, especially if we include dividends. But the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), has returned 87% before dividends.
What's important to recognise here is that we have experienced a mining boom in that time. So if that's the boom-time return, what will a return to normal market conditions look like? I think there are better opportunities available on the ASX and abroad.
- Unpredictable. To invest successfully, an investor must understand the internal drivers and external weaknesses of a business. BHP has industry-leading low costs across its major commodity groups like iron ore, copper, oil and coal. However, to understand the business we must ask ourselves what is driving the market prices of those commodities and determine if are they sustainable. I'm not sure I have the skill to predict commodity prices, so I put it in the 'too hard' basket.
- Poor economics. BHP's low costs of production enable it to generate wider profit margins than other companies. It's also unlikely to go bust. However, the company is a capital intensive business. It invests huge sums of money, takes the risk of constructing multi-year projects and relies on high commodity prices to make them viable long into the future. And after all that, if it has cash flow available, it will pay a dividend to shareholders.
Foolish Takeaway
I think investors could make a lot of money investing in resources shares at the right time. And risk-averse investors might choose to hold BHP if they were going to buy any company in the mining sector. However, you are not compelled to buy shares in BHP just because everyone else is doing it.
Indeed, BHP shares are not for me.
