Jacob Sonenshine
Copper stocks and commodity prices have surged. The latest potential merger in the sector may put the cherry on top as a sign for investors to sell.
Anglo American, a London-based diversified miner that derived about a quarter of its 2023 sales of $24.3 billion from copper, has confirmed and turned down a $39 billion offer from Australian mining firm BHP Group. Anglo American stock is up about 20% since news of the offer broke. Investors think some deal may still happen for Anglo American, seeing as the shares remain elevated.
A combined company might crimp the copper output of competitors, and hurt their profits. That could be bad for the sector overall.
Plus, copper prices and shares of copper miners have just run too hot -- and look vulnerable to declines.
Copper prices are up 28% to $4.58 per ton from a multi-month low in mid-October. Copper is particularly sensitive to general consumer and business demand throughout the globe, since it's used in so many different products, such as vehicles, consumer electronics, heavy machinery, and more.
Demand in many areas has continued to grow in the U.S., pushing copper higher. For the first few months of the rally, the expectation that the Federal Reserve would cut interest rates to keep the economy growing powered copper's rally.
The commodity's rise has sent shares of U.S.-based copper miners Freeport-McMoRan and Southern Copper up 48% and 62%, respectively, from their mid-October bottoms. Commodity stocks usually rise faster than the price of the commodity itself. A higher price lifts sales expectations, which lifts profit expectations even more because miners have many costs that don't change much.
Now, these stocks have run up to a point that makes further large gains unlikely. Freeport stock is now trading at about $50, and it hasn't topped $51 since 2011.
Southern Copper stock now trades at about $113, near an all-time high, but the last couple months of gains look like a straight line upward on the chart, the type of move that often precedes large downswings in various assets, as seen by Nvidia's recent drop after a run-up.
Consistent with that, the stocks are well above their recent trend of prices, to a degree that often portends declines.
Freeport stock is 25% above its 200-day moving average, according to FactSet. That's not a recent record, but it's at the higher end of the range. Near this level, there just aren't many more buyers to send it further upward. When it was 30% above the 200-day average in March 2022, it went on to lose almost half of its value in a few months.
Southern Copper has a similar story. The stock is 30% above its 200-day moving average, making it vulnerable to a drop. In the second half of 2023, when it was 21% above the average, it went on to fall 22% in a few months. To be sure, a rising price of copper from here could take these stocks higher, but at current copper prices, the stocks already reflect potentially higher analyst earnings estimates.
These stocks "have definitely had some big runs," says Ken Mahoney, of Mahoney Asset Management. "The risk reward is better to short" the stocks.
Also, the price of copper is vulnerable to a drop. It hasn't climbed above roughly $4.70 since April 2022, when sellers quickly came in to knock the price lower. To crack above that level, something in the global economy needs to change dramatically. The problem right now is that the Fed is unlikely to cut rates soon because of stubbornly high inflation. Now, financial markets must face the music of slowing economic growth, which data out this week have already confirmed is happening.
That, combined with the fact that many shareholders in copper miners are sitting on large gains, is a reason to sell. Using the cash to buy other areas of the equity market is a smart decision.
In a slowing economy, shares of consumer staples, utilities, and healthcare companies could see bids. Those companies don't see much change to profits when economic demand dampens, and they have significantly underperformed the S&P 500 in the past few years, giving them room to run higher from here.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 26, 2024 11:15 ET (15:15 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments