This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It’s not every day that Warren Buffett, famously averse to tech companies that aren’t named after fruit, as well as IPOs in general, agrees to buy into a hot tech IPO. Yet that’s exactly what Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is preparing to do.

To be clear, it’s highly likely that the Oracle of Omaha is not making the call personally and instead one of his investing lieutenants (Todd Combs or Ted Weschler) made the decision, but presumably Buffett had to give his blessing for such a risky investment. Let’s see if you should consider investing in Snowflake like Berkshire Hathaway is about to.

Half a billion from Berkshire

Cloud-based data-warehousing start-up Snowflake filed its initial S-1 Registration Statement a couple weeks ago and submitted an amended version this week that included some important updates. For starters, Snowflake expects to price the stock at $75 to $85 and raise approximately $2.7 billion in fresh capital. That would put the unicorn’s market cap at $20.9 billion to $23.7 billion — quite a jump from the $12.4 billion valuation that it fetched in February of this year in a Series G funding round.

Snowflake also disclosed that it will be conducting two concurrent private placements with Berkshire Hathaway and Salesforce Ventures, the venture capital arm of salesforce.com (NYSE: CRM), that will close immediately after the IPO. While Salesforce Ventures is a fixture in Silicon Valley private markets — it already has a stake in Snowflake — Berkshire Hathaway is decidedly not.

Buffett’s investment holding company has agreed to purchase $250 million worth of Class A stock through a private placement. Based on the midpoint of the expected range ($80), that would be good for 3.13 million shares. On top of that, Berkshire Hathaway is buying another 4 million shares from former Snowflake CEO Robert Muglia at the IPO offer price, or another $323 million based on the midpoint. The end result will be Berkshire Hathaway spending over half a billion dollars to buy a 2.6% stake in Snowflake.

A value investor buying a high-growth tech IPO

What does Berkshire Hathaway see in Snowflake? In no uncertain terms, Snowflake’s numbers are fantastic. Revenue skyrocketed 174% last fiscal year, and sales are up 133% in the first half of this fiscal year. The company now has 3,117 total customers, of which 56 have contributed over $1 million in trailing-12-month product revenue. That cohort of big spenders has more than doubled over the past year, up from 22 at the end of July 2019.

Remaining performance obligations (RPO), which represents future revenue under contract but not yet recognized, has more than tripled over the past year to $688.2 million. Existing customers continue to expand their relationships with Snowflake, as evidenced by a net revenue retention rate of 158%.

These types of figures will appeal to any growth investor, but Buffett tends to prefer value stocks instead of unprofitable start-ups, particularly those that are valued at nearly 60 times sales. Combs and Weschler are surely behind the move; let’s see if they can prove Buffett wrong about tech IPOs.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

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• Why Alphabet should split its stock
• 2 Warren Buffett quotes you need to read this week
• Why Warren Buffett regrets buying Berkshire Hathaway
• Warren Buffett is dumping banks and buying gold, should you?

Evan Niu, CFA owns shares of Salesforce.com. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). 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.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The new manager of troubled Blue Sky Alternatives Access Fund Ltd (ASX: BAF) has made an unprecedented guarantee to current and future shareholders.

In an extraordinary general meeting this week, 99.97% of the listed investment company’s shareholders voted to hand over the reins to Wilson Asset Management.

BAF has been treading water ever since allegations surfaced that its previous manager exaggerated the magnitude of its assets.

Shareholders had watched in horror as their price went from a peak of $1.25 to just 68 cents in 2018.

But Wilson Asset Management chair Geoff Wilson on Wednesday sought to comfort investors with a promise he claimed was the “first of its kind in the Australian market”.

Wilson Asset Management would live and die by what it calls the “premium target”.

“The principle of the Premium Target is simple: the company’s share price needs to trade at a premium to its pre-tax NTA for a period of one month for it to be achieved,” Wilson said in a memo. 

“If this does not occur at least three times during the next five years, shareholders will automatically have the right to vote to terminate the arrangements with Wilson Asset Management, and to liquidate the company.”

Blue Sky’s ironically colourful history

BAF has been in the headlines for all the wrong reasons.

The Brisbane-based LIC was born out of parent and manager Blue Sky Alternative Investments Ltd (ASX: BLA) in 2014.

BAF is an “alternative” fund because it provides retail investors access to opportunities they can’t normally reach. These include water rights, venture capital and private real estate, according to Wilson.

Back in 2018, short-seller Glaucus Research went public with accusations that Blue Sky had been exaggerating its assets under management while charging clients sky-high fees.

The company denied this was the case and even reported Glaucus to the Australian Securities and Investments Commission for price manipulation.

But eventually Blue Sky was forced to revalue its assets from $4 billion to $2.8 billion.

While all this was happening, the BAF share price tumbled. That was when Wilson first approached BAF about taking over.

While BAF was favourable about the change in management, BLA blocked the move.

Days before BLA went into administration in May last year, BAF even told its parent to stop touching its money.

After the collapse of BLA, BAF was then free to court Wilson again.

So now more than a year later, Wilson has finally been allowed in the cockpit.

No wonder Geoff Wilson was forced to make an unprecedented guarantee to BAF’s scarred shareholders.

“I personally hold 6.4 million shares in the company,” said Wilson this week.

“We will engage with current shareholders and market to new shareholders with a plan to return the share price to a premium to net tangible assets.”

More reading

• Warren Buffett is investing in this hot tech IPO. Should you?
• Is the Shekel Brainweigh (ASX:SBW) share price a millionaire maker?
• Iluka share price on watch after Deterra demerger update
• Should you ‘buy the dip’ with ASX shares?
• This devastated sector is ripe for buying: fundie

The post This LIC will be shut down if it doesn’t meet target share price appeared first on Motley Fool Australia.

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The Shekel Brainweigh Ltd (ASX: SBW) share price burst through a falling market on Wednesday with a rise of 45.45%. This company is an advanced weighing company which has integrated artificial intelligence into its products. In addition, it has a market cap of $44.48 million and looks set to grow quickly. 

There is a massive difference between the spark of invention and the process of innovation. Specifically, this is what has attracted me to this company. It is doing the very hard work of innovation to improve a developing niche. The company has two verticals, the Shekel Scales and Retail Innovation. In the retail innovation sector is the company’s flagship development technology, the micro-market project, ‘Capsule’.

The company is in an advanced stage in a pilot for this product, and investors are expecting to hear positive news after a halt to trading on Wednesday.

The Shekel Brainweigh difference

Something happened while we were in COVID-19 lockdown that changed everything. Yet, we all took it in our stride. Physical money basically disappeared. Sure, some places still accept it, but contact-less shopping appears inevitable. 

Shekel Brainweigh has a range of products designed for the contact-less shopping world. First, AI-enabled smart retail bays for grab-and-go service. The bays provide retail insights for shop owners, minimise out-of-stock, and control stock quantities to manage inventory. 

Second, the companies smart vending machines. Specifically, these include real time sales, inventory status, and automated replenishment plans. Moreover, the company has filled its first order for a minimum of 1200 machines. 

Third, in the retail innovation area is the walk-in, walk-out Capsule micro market, a truly innovative product. It boasts flawless identification and tracking, payment without checkout, is available 24/7, and is autonomous. Lastly, it uses product aware shelves, providing it with inventory management capabilities. 

The core business

The company sells “best in class” weighing technology to the retail and healthcare sectors globally. In healthcare, this includes special care scales, baby and neo-natal scales, as well as a line of products in incubators and warmers for premature babies.  In retail, it sells self-checkout technology for blue-chip OEMs

Foolish Takeaway

Shekel Brainweigh is a disruptive technology company, wrapped in a successful precision instruments manufacturer. Among other things, the company is vying for its share of the 32,000 micro markets locations it believes will exist in the US alone by 2022.

It is not the only company in either of these sectors. Nevertheless, the technology is a big differentiator. It also appears to have a good grasp on how to bring these technologies to a global market. 

More reading

• If the ASX BNPL party is over, what’s next?

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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The Iluka Resources Limited (ASX: ILU) share price will be on watch today after the release of an update on its demerger plans.

What did Iluka announce?

This morning Iluka released its booklet in relation to the proposed demerger of its Deterra Royalties business. This demerger will result in two independent ASX-listed companies.

Iluka notes that it will remain a global leader in the mineral sands industry, whereas Deterra will be the largest independent royalty company listed on the ASX with its royalty over Mining Area C in Western Australia’s Pilbara region as its cornerstone asset. This iron ore asset is operated by BHP Group Ltd (ASX: BHP).

What next for shareholders?

Iluka shareholders will have the opportunity to vote on the demerger at a meeting on 16 October 2020.

If the demerger proceeds, eligible shareholders will receive one share in Deterra for every Iluka share held at the demerger record date of 26 October. Iluka will retain a minority shareholding interest of 20% in Deterra as a long-term investment.

According to the release, the Iluka board strongly encourage shareholders to support the demerger by voting in favour of the demerger resolution. It has concluded that the proposal is in the best interests of shareholders and has potential to unlock shareholder value over time.

Why demerge the business?

Management notes that listed royalty companies provide investors with exposure to the value created through the discovery, extraction, and sale of natural resources, typically without full exposure to some of the key operating risks of mining businesses.

It also explained that royalty companies that hold revenue-based royalties typically have an advantaged position in a mining company’s capital structure, accessing cash flows ahead of debt and equity capital providers.

Finally, given its structure, Deterra will also have little use for the cash it generates. As a result, its intended dividend policy will be to payout 100% of net profit after tax. This could make it an attractive option for income investors in the future.

More reading

• Iluka share price on watch as half-year profit falls 17%

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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The ASX is certainly acting volatile in September. Before today’s movement the S&P/ASX 200 Index (ASX: XJO) had fallen 4% in the month to date. Yesterday’s drop of more than 2% may have caused a few investors to get nervous.

For various reasons people may decide to sell on these heavily negative days. I don’t think that selling because of fear alone is a good idea.

I don’t think that a business’ valuation can change by 2% or 5% in one day just because of what the market is doing. The underlying value of a business changes over the years, but ASX shares usually don’t see their future profit potential change significantly on no news.

So a good question is:

Are shares worth buying in times like this?

Warren Buffett, one of the world’s greatest investors, has a great quote: “Be fearful when others are greedy, and greedy when others are fearful.”

As investors one of the most important things for us is buying at good prices. When the share market falls in value you’re obviously able to buy ASX shares at a lower price, though it’s up to you to decide if it’s better value.

I was a buyer of shares through the first COVID-19 crash during February, March and April. I thought it was a once-in-a-generation opportunity. It turned out to be a great, but short-lived opportunity.

The ASX is/was falling again, though I don’t think we will see the market fall in September as low as it did during March. It could easily bounce back over the coming days.

Bear in mind that the official RBA interest rate is still extremely low. This goes some way to explain why some ASX shares are valued highly in the current environment. A business like APA Group (ASX: APA) which generates consistent levels of cashflow is valuable for income investors. Same with a major ASX blue chip share like Wesfarmers Ltd (ASX: WES), it has quite reliable profit.

How often do you get to buy ASX shares at much cheaper prices than they were before? It doesn’t happen very often. The share market tends to steadily grow over the long-term, but it usually falls fast when it declines – and then goes back to rising. Those buying opportunities don’t last long.

I think it’s definitely worth buying ASX shares when they drop lower, why wouldn’t you?

At the current prices I like the look of businesses such as A2 Milk Company Ltd (ASX: A2M), Citadel Group Ltd (ASX: CGL) and Pushpay Holdings Ltd (ASX: PPH)

Should you wait for dips to buy ASX shares?

The share market has proven to be a long-term wealth creation tool. It has returned 10% per annum – that includes the moments of declines.

If you only waited for major dips to buy then you may end up investing very infrequently. And your cash would hardly return anything with how low the bank interest rates are.

There are various studies, books and quotes that generally suggest that market-timing doesn’t lead to outperformance. No-one can know what the share market will do. No-one could have predicted the severe March COVID-19 crash, nor the rapid recovery.

If you genuinely can’t find anything good value to buy then I don’t think there’s anything wrong sitting on the cash for a little while. You don’t need to invest instantly when you have access to money.

But if there is an opportunity, I think you should take it. You just don’t know how long that ASX share will be at an attractive price for. I invested extra money during the volatility and I’ll invest extra again if markets drop again. But I’m going to keep doing my monthly investing into whatever ASX share I think looks good value at the time.

More reading

• Should you buy Bega Cheese (ASX:BGA) shares at near an all-time high?
• An all-weather ASX resources shares strategy
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 drops over 2%, tech and oil fall
• Why the Clean TeQ (ASX:CLQ) share price fell 10% today

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 post Should you ‘buy the dip’ with ASX shares? appeared first on Motley Fool Australia.

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A veteran fund manager has identified one sector that COVID-19 almost sent broke as a rare buying opportunity.

Wilson Asset Management lead portfolio manager Oscar Oberg said that his company is currently holding Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD) shares.

“Given the second wave we’ve seen in Melbourne and continued cases in Sydney, you’d probably think I’m a bit mad for looking at the travel sector,” he said on an investor call.

“What we’re seeing in the travel sector is all-time very, very low valuations.”

Oberg said that conditions for travel companies could dramatically improve when state borders open up, which could be as soon as this Christmas.

“If you go back prior to COVID, Australians spent just over $60 billion on international tourism last year. This compares to about $50 billion on domestic tourism,” he said.

“When the borders open up, we think a big portion of this spend on international tourism will flow onto domestic tourism.”

Travel companies have “much stronger balance sheets than what the market gives them credit for”, according to Oberg, and are ready to pounce.

“We think they’re well-positioned to benefit from domestic tourism once [state] borders reopen.”

Ready to pounce with solid balance sheets

Wilson Asset Management felt Webjet and Corporate Travel were especially underrated.

“The expectations for these stocks were very low going into their results [last month]. The market said they were going to downgrade earnings and they have balance sheet issues,” he said.

“We were comfortable around their liquidity. We also spoke to a number of companies overseas and… there were signs of life with tourism, particularly in Europe, and the corporate travel market.”

Oberg admitted it could be a long recovery for the travel sector.

“We’re getting a sniff that a vaccine could be around the corner. And this is certainly one industry that would really benefit.”

Regarding the other big travel player Flight Centre Travel Group Ltd (ASX: FLT), Oberg said while Wilson did not hold its shares, the outlook was similar.

“It was all my fault. I sold the business too early, at $10.50,” he said.

“We’ve seen the share price rebound with the results [last month].”

Surprisingly, business travel has recovered fastest among all the travel sub-sectors. And Flight Centre, according to Oberg, has substantial activity in that area.

“If you look at travel stocks, there’s a lot to occur over the next 1 to 2 years. But you’ve got to take a long-term view,” Oberg said.

More reading

• Is the Flight Centre (ASX:FLT) share price about to take off?
• ASX 200 rises 1%, CSL (ASX:CSL) leads the way
• The Corporate Travel Management share price is up 65% in a month: Is it too late to invest?
• These are the 10 most shorted ASX shares
• The one type of ASX company that outperforms all others

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. 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.

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Wednesday saw the S&P/ASX 200 Index (ASX: XJO) drop by 2.15% with large scale falls throughout the market. Moreover, the buy now, pay later (BNPL) sector was particularly hard hit with Sezzle Inc (ASX: SZL) the biggest loser. Sezzle saw its share price fall by 7.47%. Although, this was only the latest fall. The ASX BNPL sector has been on a slide since 28 August. 

The sudden fall of the ASX BNPL sector

The Sezzle share price hit its year to date high mark on 28 August. Since then it has collapsed by 39.95%, almost half. Most other ASX BNPL shares fared little better. From 31 August Zip Co Ltd (ASX: Z1P) has fallen by 27.84%, Openpay Group Ltd (ASX: OPY) by 31.9% from 28 August, Splitit Ltd (ASX: SPT) by 20.43%, and market leader Afterpay Ltd (ASX: APT) by 19.02%.

There are a few reasons for this. However, most of the falls came after Paypal Holdings Inc (NASDAQ: PYPL) declared it would enter the market with an existing network of 204 million users globally. This seemed to finally pierce the bubble of hype around these shares. It was followed shortly after by the inital public offering (IPO) of Laybuy Holdings Ltd (ASX: LBY).

Moreover, PayPal is not the only shark in the water. Commonwealth Bank of Australia (ASX: CBA) has already entered the BNPL market locally via its partnership with Swedish private bank, Klarna. To illustrate the point further, there are even more private companies in this sector like LimePay.

In case it hasn’t already become blindingly obvious to us all, there are simply very few barriers to entry. In addition, there are many other players in the banking and payments industries that could easily and quickly enter the market.

So, what’s next?

Along with ASX BNPL shares, we also saw industrial age shares like Oil Search Limited (ASX: OSH) fall by 7.79%. Likewise, information age companies like Megaport Ltd (ASX: MP1) fell by 6.08%. So what held up? Innovation shares. Companies in truly innovative areas held their ground or gained significantly.

I picked up on two great examples of this today. First, Brainchip Holdings Ltd (ASX: BRN) continued its fantastic run by rising by 2.74%. The artificial intelligence company has seen its share price rise by 316.67% since 13 August. It recently announced the first two proof of concept partnerships for its first-of-a-kind neuromophic chip.

Second, in a burst of 45.45%, was Shekel Brainweigh Ltd (ASX: SBW). This is an advanced weighing technology firm, integrating artificial intelligence into its technologies. On Wednesday the company entered a trading halt. The market is expecting news of its micro-market project ‘Capsule’, which is in an advanced stage of its pilot program. 

The Capsule is an innovative 24/7, autonomous micro-market. This is a range of very high tech vending machines within a sealed unit which provides owners with a large range of information on shelve movements, perfect real time inventory management platform, and customer tracking technology.

Foolish Takeaway

I don’t think the ASX BNPL sector is dead, far from it in fact. It has just entered a new phase of growth. I think the steam is likely to come out of BNPL share prices very soon if it hasn’t already, but moderate growth will remain.

In any case, the entire sector is becoming less and less like a final frontier. Sector leaders are emerging, and the predatory finance giants that have been sitting on the sidelines are starting to enter. Just as today every bank has a mortgage section, every alternative finance company can have a BNPL section, and in future I believe it will be regulated.

I still own some shares in Sezzle, and I like Zip Co, but I have sold down to take profits at this stage. However, I am looking more and more into the amazing innovation companies we have on the ASX. Companies that are building the future before our eyes. 

More reading

• Is the Shekel Brainweigh (ASX:SBW) share price a millionaire maker?
• 4DS Memory (ASX:4DS) share price rockets 46% higher today
• Why Brainchip (ASX:BRN) shares are topping the ASX today
• Brainchip (ASX:BRN) share price jumps 15% after ASX query
• Why BrainChip, Codan, IPH, & Nufarm shares are climbing higher today

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended MEGAPORT FPO and Sezzle Inc. 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 post If the ASX BNPL party is over, what’s next? appeared first on Motley Fool Australia.

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The Bega Cheese Ltd (ASX: BGA) share price slumped 1.7% lower yesterday to close at $5.36 per share.

That’s just shy of the 52-week high of $5.63 that the Aussie dairy group’s shares hit earlier this week. So, amongst the noise of the markets right now, are Bega Cheese shares a buy?

Why the Bega Cheese share price has surged

It’s been a funny old year for many ASX shares. Consumer staples shares like Bega Cheese have generally done well amid the coronavirus pandemic.

The ASX supermarkets like Coles Group Ltd (ASX: COL) have done well as restrictions have meant more people purchasing food from supermarkets. We’ve also seen waves of panic buying across the country throughout the year.

That has seen downstream suppliers like Bega Cheese perform strongly. In its full-year earnings result, the Aussie dairy group announced a 5% increase in revenue to $1.5 billion.

Operating cash flow jumped from $100.3 million to $137.7 million as sales surged across its product lines. That included a 9.8% surge in its spreads sales with Vegemite and peanut butter growing 4.8% and 14.3% higher.

Those strong sales figures have underpinned strong capital gains for Bega Cheese shares in 2020.

Is Bega Cheese a tasty buy?

I think some investors would hesitate to buy an ASX share at a 52-week high. However, there is still a lot to like about Bega Cheese shares right now.

For one thing, the broad market sell-off across the S&P/ASX 200 Index (ASX: XJO) has shown that volatility is still present.

I like the Consumer Staples sector given its non-cyclical earnings. That was reflected in Bega’s full-year result and I think it can repeat that strong sales growth next year.

ASX dividend shares are also good when times are tough. Bega Cheese shares are currently yielding 1.9%, which is quite handy in the current environment.

All in all, I don’t think we’ll see a surge in the Bega Cheese share price in the next 12 months. However, it does appear to be a solid ASX dividend share with strong cash flow generation.

More reading

• Should you ‘buy the dip’ with ASX shares?
• An all-weather ASX resources shares strategy
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 drops over 2%, tech and oil fall
• Why the Clean TeQ (ASX:CLQ) share price fell 10% today

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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 post Should you buy Bega Cheese (ASX:BGA) shares at near an all-time high? appeared first on Motley Fool Australia.

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ASX resources shares are one of the more controversial sides of the ASX. Despite the likes of BHP Group Ltd (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), Fortescue Metals Group Limited (ASX: FMG), Newcrest Mining Limited (ASX: NCM) and Rio Tinto Limited (ASX: RIO) occupying large swathes of the S&P/ASX 200 Index (ASX: XJO), many ASX investors avoid the sector at all costs.

Whilst mining and drilling companies have the potential to deliver windfalls to their shareholder owners, they are not without their flaws.

As such, many investors simply avoid the ASX resources sector on principle. They might not like the resources industry period, perhaps through concerns over climate change or other ethical reasons. Or they might not be enthused from a business standpoint at how resources companies are almost always ‘price-takers’. By this, we mean that a resources company has no say over what price it is able to sell its products. It doesn’t matter how good iron ore is from one of BHP’s sites, it will still command what the worldwide iron ore price is at the time. Contrast this with a company like Apple Inc. (NASDAQ: AAPL), which can control its own destiny by charging whatever it likes for its iPhones.

A good year for ASX resources shares in 2020

Even so, there’s no doubt that 2020 has been a good year to own most mining companies outside the oil space.

Take Fortescue Metals. Whilst the ASX 200 index is still down more than 12% for the year, the Fortescue share price is up around 67%.

And while the likes of Commonwealth Bank of Australia (ASX: CBA), Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have spent 2020 mauling their dividend payments, the cash continues to flow out of Fortescue, BHP, Newcrest and Rio (albeit with varying degrees).

But ASX resources shares also have a problem: most of them are highly cyclical companies that rise or die on the back of the prices of the commodities they extract. If the iron ore price halved tomorrow, you can expect the share prices of any iron ore miners to join it over the cliff. The only reason 2020 has been kind to the resources sector is that most commodities’ prices have held up remarkably well in the face of the coronavirus pandemic.

So how does one invest in such a controversial sector? Well, I think there’s a nice balance to be struck for anyone who wants a slice of the bounties of our natural resources in their portfolio.

The ‘old BHP’

It involves investing in the ‘old BHP’. See, BHP used to be a much larger company. But it split off some of its divisions in 2015 into a new company – South32 Ltd (ASX: S32). Today, the ‘new BHP’ focuses primarily on 4 commodities – coal, iron, petroleum and copper. South32, in contrast, holds ‘everything else’ that BHP used to be involved in. That includes magnesium, aluminium, silver, lead and zinc operations across the world.

By holding both of these shares in your portfolio, you would hold a highly diversified and balanced exposure to the ASX resources sector – one that would be far less exposed to the ups and downs of the commodity pricing cycle than a single-resource pureplay like Fortescue or Woodside. If I were to expose my portfolio to the ASX resources sector, this is the strategy I would personally use. You might not get the highs of a single commodity pricing boom, but not being exposed to things going the other way is your compensation.

More reading

• 5 things to watch on the ASX 200 on Thursday
• ASX 200 drops over 2%, tech and oil fall
• Why the Clean TeQ (ASX:CLQ) share price fell 10% today
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Sebastian Bowen owns shares of Newcrest Mining Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia has recommended Apple. 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.

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The Fortescue Metals Group Limited (ASX: FMG) share price fell by 2.7% yesterday. In fact, since its year high on 27 August it has come down by 6.74%. Consequently, the share is currently selling at a price to earnings ratio (P/E) of 8.55, with a trailing 12 month (TTM) dividend yield of 9.78%. 

That is far cheaper than comparable ASX shares in the iron ore sector. For example, Rio Tinto Limited (ASX: RIO) currently has a P/E of 16.37, while BHP Group Ltd (ASX: BHP) has a P/E of 17.06. That’s not all though. If you compare Fortescue shares with other similar mining companies, there is still no comparison. For instance, Newcrest Mining Limited (ASX: NCM) is about half the market cap of Fortescue, yet has a P/E of 27.36.

Price to earnings is a crude indicator of value, but it serves to make the point that Fortescue shares are selling at a lower price, relative to earnings, than similar companies, and paying a high dividend yield. However, there are two other very strong reasons why Fortescue shares will make you richer.

Volume and quality

Economist are almost speaking in unison when they tell you that China needs our iron ore. Moreover, they need it now more than ever due to stimulus spending. In fact, China in June became a net importer of steel for the first time in 11 years. The country imported just over a million tonnes more than it exported in June.

In the current economic climate, a mine known as “the Pilbara Killer”, or Simandou, has re-entered the conversation. This is a 60/40 partnership between Rio Tinto and China giant Chinalco respectively. When it first appeared, it was feared Simandou, located in Guinea, would make ghost towns out of the north west. Thus rendering Fortescue shares almost worthless, along with everyone else in the iron ore game. 

It is an orebody reserve of 2.4 billion tonnes of 65% iron. However, over the years it has become obvious that this is highly unlikely to occur. The costs of construction, regular outbreaks of the ebola virus and political uncertainty stopped the original project. Nonetheless, it is currently under review again as China seeks more steel independence.

Most estimates place the timeline to production at between 5 and 7 years. In addition, even if the most optimistic schedules were achieved, Guinea would produce only about 7% of global demand, while Australian market share would remain constant.

Fortescue has already spent the capital, developed the mines, and optimised operations. The volumes and quality required to meet any increase in global steel demand as part of stimulus spending, will be best served by the Australian miners at scale.  

Fortescue shares best days are ahead

Fortescue CEO, Elizabeth Gaines, recently commented “…people have been talking about Simandou for a very long time and it certainly has its challenges around infrastructure. So we’re not ignoring that, but we’re staying focused on our strategy of delivering our Iron Bridge project, which is a high-grade magnetite concentrate that will be in high demand in the market.”

This underlines the company’s immediate expansion goals. For instance, Eliwana mine will be a 30 mtpa operation. Moreover, December will see its first iron ore train. This has 60.1% iron.  Moreover, the Iron Bridge project has a grade of 67% iron, and is a 22 million tonne per year mine, scheduled for first shipment in mid CY22. 

Lastly, it is a pure play iron ore company. Therefore, under performing assets in copper, nickel or aluminium do not weigh down the Fortescue share price. 

Foolish takeaway

Fortescue shares are a fantastic value opportunity over 3–10 years in my view. Its low direct costs show it to be a well-managed company. Moreover, the only competitor on the horizon is 5–7 years away, and even then will only be able to manage around 7% of the global market. Lastly, the company already has the scale and quality to compete rapidly, which is only going to continue to grow.

Right now the company’s shares are selling very cheaply and it pays a solid dividend. I own Fortescue shares, I intend to keep them for many years to come, and they have already added significantly to my net worth.

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Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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