Commodity Bets: Alcoa and Southern Copper

09/08/2017 2:52 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

After a lackluster performance for the first half of 2017, we’re starting to see more metals and mining stocks perk up; here's a look at two commodity companies which are getting support from an improving global economy, suggests Mike Cintolo, editor of Cabot Top Ten Trader.

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Alcoa (AA) could be a big-cap leader of the group. Alcoa is a leading producer of aluminum and alumina, and business has perked up as the global economy has kept demand on the upswing.

In the second quarter, the firm’s realized prices of aluminum and alumina were up 19% and 18%, respectively, from a year ago, which drove revenues up 23% and EBITDA up a solid 56%.

And it’s looking like even higher prices are on the way, as production cuts in China (in an effort to curb pollution) pushed aluminum prices to nearly six-year highs last week, including a 20% rise just in recent weeks.

Plus, it’s worth noting that other metals (like copper) are also strengthening, so the accelerating global economy could be having more of an impact than many believe. Whatever the reason, the next year looks bright for Alcoa.

The advance of the past two-plus months has been excellent and relatively persistent, including a good-volume move to new highs last week. Expect volatility, but we’re OK with a small purchase here or on dips, and a stop near $36.

Arizona-based Southern Copper (SCCO) mines, smelts and refines copper and other metals and minerals from mines in Central and South America.

Despite the company’s significant production of molybdenum, silver, zinc and other metals, Southern Copper is a copper story and the company is doing well because copper prices are rebounding from their 2016 lows.

Copper is an economically sensitive commodity, and prices have been getting support from the improving strength of the Chinese economy, which is one of the major markets for copper, as well as a global rise in demand.

With rising copper prices boosting earnings, analysts expect EPS to grow by 63% this year. The good July earnings report kicked the stock to multi-year highs, and after a brief correction to $37 earlier this month, SCCO has pushed out to new highs, including a constructive volume spike on August 15.

If the global economy holds up, SCCO (and its 1.4% dividend yield) should continue to do well. Look for a pullback to $41 as an entry point and keep a stop around $37.

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