Interactive Investor

Chart of the week: a FTSE 100 stock with 25% upside potential

12th July 2022 11:37

John Burford from interactive investor

Shares in this FTSE 100 big hitter plunged by a quarter in just one month, grabbing the attention of technical analyst John Burford who thinks there's a buying opportunity here.

Glencore is cheap - buy

With raw commodity prices in steep corrections, mining and commodity trading shares have come under severe pressure of late. Even Glencore (LSE:GLEN), the FTSE 100 producer and trader, has suffered from the recent commodity slide – oh, and the settlement of the large bribery case.

And, of course, the dominant fear stalking markets recently has been the widespread forecast for a global recession that would inevitably hurt commodity demand.

But has all or most of the bad news been priced in, and can shares resume their advance? Despite the push toward more sustainable sources of energy, demand for coal has never been higher, with prices at or close to record highs. Glencore is a major coal producer. Shades of King Coal!

Much of this demand is from India and China who actually wish to keep the lights on when the weather-dependant wind and solar sectors fail to deliver. And coal remains the lowest cost fuel for electricity generation.

In any case, the contribution from these 'sustainable' sources are tiny in those nations – as it is in the less developed world. So, the global outlook for coal remains very positive.

And here in Europe, even the leader of the 'green' revolution, Germany, is ramping up its use of coal for power generation as some regions are suffering from electricity rationing already – and the winter is yet to come. 

Let's take a look at Glencore’s chart:

Past performance is not a guide to future performance.

The decline off the early June 550p high has been steep and has undoubtedly shaken many investors out of the tree, as visions of a looming recession are spread across financial headlines.

And the decline to the 5 July low of 400p has retraced a Fibonacci 62% of the advance off the late 2021 lows – a common area where major support lurks. And given the steep momentum divergence there, odds are that the shares have found at least a good base. My first target is around the 500p region.

The dividend yield is a healthy 4% or so and could rise, especially if coal priced in dollars remains in a bull mode. Given the sharp fall in sterling, those earned dollars are especially valuable.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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