Top Picks 2017: Rio Tinto

Stephen Leeb Founder and Research Chairman, Leeb Group

While 2016 gave commodities a big lift, I think that investors should continue to own at least some commodity-related stocks, explains Stephen Leeb, editor of The Complete Investor

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.

Very little has changed in the last year as concerns the fundamental strength and value of commodities, and their likely success as long-term investments.

This relationship to oil is strongest with respect to iron ore. 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.

Particularly given the ambitious infrastructure building plans in the East, spearheaded by China’s New Silk Road plans, expect demand for iron ore to significantly rise.

This -- along with the likely increase in oil prices -- make iron ore a smart pick despite its abundant supply.

Of the major commodity producers, our favorite remains Rio Tinto (RIO); the stock was also as our Top Pick last year, gaining 32%. With a dividend-reinvestment plan, the 2016 total return would have spiked to 39 percent.

We recommend it again in 2017. As a testimony to management, we emphasize the 12-month yield of 3.9%, backed by a trailing 12-month free cash flow yield that hovers above 6%. RIO 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. And its forward P/E is only 15.5

Even after its 2016 performance, RIO would need to more than double before meeting its 2011 high—and nearly quadruple before it hitting its 2008 high.

But let’s be conservative. Given that RIO today remains trim and fit, we think a reasonable 12- to 24-month target would be another 50% gain.

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