Top Resource Stocks for 2012 on Sale
12/08/2011 7:30 am EST
One of the top-rated blue-chip commodity stocks has fallen to valuations it rarely reaches, meaning a strong rebound is likely, writes Kevin McElroy of Resource Prospector.
Freeport McMoRan (FCX) currently has more superlatives than a high-school yearbook:
- It’s the biggest copper miner in the world.
- It owns the mining rights to three of the world’s largest copper mines—one in Utah, one in Indonesia, and one in South America.
- According to the 2011 Forbes 2000 list, Freeport is the also the highest ranked gold-mining company. Forbes ranks companies based on sales, profits, assets, and market value—so Freeport beat out market favorites like Gold Corp (GG), Barrick Gold (ABX) and Newmont Gold (NEM).
- Even better, Freeport currently sells for less than seven times earnings, and they pay a 2.5% annual yield.
Even for a big boring mining company, seven times earnings is cheap. The entire sector is cheap now too—with the average P/E ratio just above ten.
Of course, underscoring my enthusiasm for Freeport is my thesis for higher commodity prices—yes, even copper.
And I’m quite aware that copper is the only commodity with a PhD in economics. I’ve heard all the platitudes about copper being a harbinger of the broad economy, and that copper needs growth and economic expansion in order to maintain higher prices.
But we’ve seen this scenario before. Demand for copper can fall, even as its dollar-denominated price rises.
That’s because supply and demand aren’t the only functions that influence asset prices anymore. We’re through the looking glass, and a currency crisis will eventually make everyone pay more for every asset—even if it’s a growth asset like copper.
Not only is Freeport cheap, it also meets all of my other objections. It has very little debt. A huge profit margin. It’s trading near 52-week lows.
And every time it’s been this cheap in terms of P/E ratio, the company soared in price over the next year. In different terms: Freeport has rarely been this cheap on an earnings basis.
Now, I’m not saying you should go out and load up the truck today on Freeport. I’m saying you should look for weakness in this stock, and buy in tranches over the next few months. I think we’ll see significant gains over the course of 2012.