Can Rio Tinto Find Higher Prices?

diamonds

With shares of Rio Tinto (NYSE:RIO) trading around $40, is RIO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our Cheat Sheet investing framework:

T = Trends for a Stock’s Movement

Rio Tinto is engaged in finding, mining, and processing mineral resources. Its products include iron ore, aluminum, copper, diamonds, coal, uranium, gold, and industrial minerals. Rio Tinto has been trying to divest itself of non-core and unprofitable assets since CEO Sam Walsh took over the company. It previously stated it was not interested in selling its Mozambique coal operations, but has changed its mind after failing to find a buyer for its diamond businesses. Expect Rio Tinto to grow as it grabs hold of its business again and continues to provide raw materials around the world.

T = Technicals on the Stock Chart are Weak

Rio Tinto stock has struggled to generate positive returns in the past few years. The stock is now trading at low prices not seen since 2009. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below, Rio Tinto is trading below its declining key averages, which signal neutral to bearish price action in the near term.

RIO

Taking a look at the implied volatility (red) and implied volatility skew levels of Rio Tinto options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Rio Tinto Options

31.25%

93%

90%

Investors or traders are buying a significant amount of call and put options contracts compared to the past 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of Wednesday, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

E = Earnings Are Mixed Year-Over-Year

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions also help gauge investor sentiment on Rio Tinto’s stock. So how did the markets like these numbers?

2012

2011

2010

2009

Earnings Growth (Y-O-Y)

-417.94%

-121.95%

145.73%

182.46%

Revenue Growth (Y-O-Y)

-19.58%

2.51%

33.28%

-7.35%

Earnings Reaction

N/A

N/A

N/A

N/A

Rio Tinto has seen mixed earnings and revenue figures in the past four years. Rio Tinto does not have any earnings reaction data available.

P = Poor Relative Performance Versus Peers and Sector

How has Rio Tinto stock done relative to its peers BHP Billiton (NYSE:BHP), Freeport-McMoRan (NYSE:FCX), Vale (NYSE:VALE), and the sector?

Rio Tinto

BHP Billiton

Freeport-McMoRan

Vale

Sector

Year-to-Date Return

-29.92%

-26.40%

-22.25%

-37.55%

-28.55%

Rio Tinto has been a relative performance leader, year-to-date.

Conclusion

Rio Tinto is focused on mineral mining and processing, providing these raw products to companies around the world. The stock has struggled in the past several years and is now trading at low prices not seen since 2009. Over the past four years, earnings and revenue figures have been decreasing. Relative to its weak peers and sector, Rio Tinto has been a poor year-to-date performer. STAY AWAY from Rio Tinto stock for now.

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