Due to its volatility and unpredictability a lot of investors will bypass the resources sector.
Whilst I do think this is understandable, I believe a truly diversified portfolio should have a little exposure to the sector.
After all, the 16% gain by the S&P/ASX 200 Resources (Index: ^AXJR) (ASX: XJR) during the last 12 months has played a key role in the 4.5% gain by the benchmark S&P 200.
With that in mind, I thought I would take a look at four industry leaders to see if there's an investment opportunity today. They are as follows:
BHP Billiton Limited (ASX: BHP)
This mining giant is often the first port of call for investors looking at the resources sector. This is for good reason, in my opinion BHP has some of the best assets in the world and is in a strong position to profit greatly when commodity prices are favourable. The two key commodities to look for with BHP are iron ore and copper. These two commodities accounted for approximately 60% of its revenue in FY 2016. Whilst I am bullish on copper, I'm a little bearish on iron ore. As a result, I would class BHP as a hold.
Fortescue Metals Group Limited (ASX: FMG)
Unlike BHP, Fortescue doesn't have diversified operations. The only thing that matters for the company is the price of iron ore. And the price of the lower grade product to be precise. Whilst demand in China has been strong this year, there have been signs in recent days that demand is weakening. Should demand continue to weaken then there is a chance that prices will tumble sharply, putting pressure on Fortescue's share price.
Newcrest Mining Limited (ASX: NCM)
Whilst I think that a diversified portfolio should have a little exposure to gold, I wouldn't look to gain it through Newcrest. Although it is easily one of the highest quality miners on the Australian share market, its shares are significantly more expensive than many of its peers. Because of this, I would suggest investors look elsewhere in the industry.
Santos Ltd (ASX: STO)
Thanks to its transformation into a low-cost oil and gas producer, I think Santos is worth taking a closer look at. The company recently announced that its free cash flow breakeven oil price is now US$33 per barrel. If the company can maintain or improve on this and oil prices stay at their current levels for the foreseeable future, then Santos will be in a position to generate bumper profits and increase its dividend substantially. If you are confident on oil prices then Santos could be a great option.
