Wednesday, February 11, 2009

Time for Commodities?

Commodities have been in a secular downturn for almost a year. It is a distant memory when oil touched 145$ and how people were predicting 200 and 250$ oil. Now oil is barely able to crack 50$. The same can be said for various other commodities. Copper has fallen from 4$ to 1.5$. Aluminium has fallen from 1.4$ to .65$. Zinc has fallen from 1.25$ to .5$. Suffice it is to say that Commodities have seen a massive correction - in many cases upwards of 60%. This has impacted commodities stock and many have fallen by similar if not larger amount.

I recently came across a stock which has some very interesting characteristics:
  • It has profitable operations and have been able to make money in Q4 and throughout this downturn.
  • Sum of parts along with cash is worth more than the market value of the company.
  • Sum of parts is quoted in the market so that an easy hedging strategy can be followed.
The name of the company is Sterlite Industries (SLT). This is part of the Vedanta group of companies which is based in London. So what ails the stock? Some of the issues I see are:
  • Lack of clarity around what is around the corner with Arasco transaction. In 2008 company agreed to pay more than 2.5Bn $ for the entity. Current negotiations are ongoing and that is making investors nervous.
  • Management interest may not be fully alligned with shareholders because one entity own the majority of the shares and the majority owner have similar interests through other entities.
Overall, I do believe it is a good time to look at the stock. If you have patience and are willing to hold out for a 3 year period this could be a multi bagger. The key is patience.


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