Top Picks 2016: Rio Tinto

01/25/2016 7:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

I think investors should own at least some commodity-related investments. Specifically, the relationship between oil and most other commodities is strong, with oil for many reasons being an important factor in the price of most base metals, explains Stephen Leeb, editor of The Complete Investor.

This relationship is strongest with respect to iron ore, of which there is abundant supply, although the material’s cost, due to its weight, strongly relates to the cost of transportation and oil, the latter being the mother of all commodities.

Of the major commodity producers, our favorite is the aforementioned Rio Tinto (RIO), which we recommend for 2016.

As a testimony to company management, we emphasize the current yield of 7.4%, backed by a trailing 12-month free cash flow yield of roughly 12%. The company has a no-dividend-cut policy.

Besides iron ore, we like RIO for its second largest product, aluminum. The company’s aluminum assets lie in the geopolitically stable US and Canada, where there’s little risk other than price. 

Should copper become too expensive, as an alternative to the red metal, aluminum would see a jump in demand. Moreover, RIO produces little oil, meaning it currently faces little direct exposure on that score.

It would be foolish to try to call a bottom in RIO as the stock now trades at six-year lows and could go even lower. Still, keep in mind that, at current levels, the stock could triple and still be well short of its 2011 highs.

Given that the company today is far leaner than it was at the beginning of the decade, we think that a 24- to 30-month target of a 100% return is well measured.

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