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Are resource shares like BHP the best value on the ASX?

Tristan Harrison

Are ASX resource shares like BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) the best value available to investors?

There are various blue chip shares on the ASX that are close to their all-time highs like CSL Limited (ASX: CSL), Wesfarmers Ltd (ASX: WES) and Macquarie Group Ltd (ASX: MQG). Any business demonstrating growth has been sent a lot higher.

Then there’s the tech sector. Growth shares have also seen tremendous price support. They are delivering impressive growth, but there’s no doubt that shares like WiseTech Global Ltd (ASX: WTC), Xero Limited (ASX: XRO) and Afterpay Touch Group Ltd (ASX: APT) are expensive compared to the rest of the market. Although if rates stay low for a long time, perhaps these valuations are justified.

Either way, there’s an argument that resource shares like BHP and Fortescue are the best value at the large end of the market. BHP is valued at only 15x FY21’s estimated earnings and Fortescue is priced at 9x FY21’s estimated earnings. These valuations seem much easier to digest.

But, the problem is we don’t know what earnings for BHP and Fortescue are going to look like in five years let alone in FY21. Resource prices are very hard to predict. Economic cycles are tough to forecast, demand changes and supply can change depending on the price of the commodity.

It would probably be a mistake to invest in resource shares for dividends. The yields of BHP, Fortescue and a few others look irresistible based on the trailing 12 months and near-term outlook, but who knows what’s going to happen in 2021?

Foolish takeaway

Some ‘value’ fund managers are looking at some commodities like copper that could go higher based on growing demand because of the growth of electric and renewables. If that’s true then OZ Minerals Limited (ASX: OZL) may be one to watch over the next few years. But I’m not a big fan of resource shares because of their unpredictability.

The post Are resource shares like BHP the best value on the ASX? appeared first on Motley Fool Australia.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019