Time to Buy Copper Again?

12/08/2008 1:00 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies and Skousen High-Income Alert, says a copper stock might make a good trade at current depressed prices.

More than 2.9 billion pounds of copper are used in construction every year, primarily in plumbing and wiring. Electronic products use more than 1.9 billion pounds a year. (Copper is second only to silver in its ability to conduct electricity.)

Transportation equipment—including cars, trains, planes, and submarines—uses more than a billion pounds a year. The manufacture of industrial equipment requires another 1 billion pounds annually. And consumer and general products, from cookware to church bells to pennies, require another 800 million pounds.

We have traded Southern Peru Copper (NYSE: PCU) profitably more than once. It's time to do it again.  

As you may recall, Southern Peru operates the world's largest copper mine high in the Andes mountains, producing more than 800 million pounds of copper a year.

Of course, the commodity bull market that was running at a full gallop in the first half of this year has stopped dead in its tracks. Copper prices are no exception. When building and manufacturing slow, so does the demand for the red metal.

However, the slowdown is more than reflected in Southern Peru's current price, down 70% during the past year [from a peak above $40], even though operating margins are 52% and management is earning a whopping 46% return on equity.

This stock is so cheap that it sells for just six times earnings. That's pretty amazing when you consider that the company is benefiting from lower fuel costs and continued strong demand in China, India, and other major emerging markets.  

Southern Peru also is yielding 10.9%. With the company sitting on more than $1.2 billion in cash, it will have no trouble paying its dividend.

Make no mistake, this is a contrarian play. Commodity prices are unpredictable from one week to the next. But if you believe in buying straw hats in winter, PCU is an exceptional value at these levels.

And with the double-digit yield, who's in a big hurry to lock in a profit next week?

So pick up Southern Peru Copper at market today. And place a protective stop at $10. If you prefer to play this more aggressively, try the Southern Peru March $15 calls (PCU-CC). (The stock closed above $12 Friday, while the calls traded at $1.55—Editor.)

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