You know the story with commodity stocks by now: Gold has imploded, a persistently strong U.S. dollar has held back prices of everything from steel to soybeans and manufacturing woes in China have hurt demand for coal, copper and the rest.
But since we’re all talking about these trends, doesn’t that mean the worst is baked in?
As the saying goes, the time to buy is when there’s blood in the streets. And there has been quite a bloodletting in the commodity sector across 2013. Take a look at these returns:
- Coal king Peabody Energy (BTU) is down 42% since Jan. 1 vs. 16% gains for the S&P 500.
- Iron giant Vale (VALE) is down 39% YTD — and thus in last place for InvestorPlace‘s Best Stocks of 2013 contest.
- AK Steel (AKS) is down 29% YTD.
- Southern Copper (SCCO) is down 28% YTD.
- Aluminum player Alcoa (AA) is down 9% YTD.
If you can find a few signs of a bottom — or better, signs of life — in the sector, it can signal a great buying opportunity amid big-time negativity.
Here are a few hints that, at worst, we have found a floor in commodities:
Stabilizing Steel: As this great chart from Emerging Money points out, steel has put in a very strong base across the beginning of 2013 to stabilize after recent declines. That could be a bullish sign not just for stocks in this industry like AKS or heavily shorted U.S. Steel (X), but also other base metal players looking for a silver lining to their own cloudy price outlooks.
Out With the Old: Coal and iron giant Cliffs Natural Resources (CLF) has given up over 50% year-to-date. That’s thanks to weak global demand and soft prices, but also the overhang of expansion projects — like one in Quebec — that were very poorly timed. Partially as a result of this need to (ahem) adjust the scale of its business, the CEO recently stepped down — and shares subsequently popped. This mimics the boost we saw at mega-miner BHP Billiton (BHP) in February when it installed a new exec. Elsewhere, steel giant ArcelorMittal (MT) is planning a change to its mining CEO in August. Like it or not, perception is key on Wall Street and turning a page on overexpansion and deep losses is an important psychological move for the sector.
Alcoa’s Beat: Yes, Alcoa largely beat forecasts because Wall Street moved the bar down so low recently. But that negativity is telling of how low expectations are. And with Alcoa’s earnings details showing mild strength in the aerospace and vehicle businesses, that could be bullish for many base metal companies serving durable goods manufacturers.
The bottom line is that, yes, the pain in China is very real and commodity prices will likely stay reasonably soft. And yes, gold miners are their own particular brand of pain that should be avoided at all costs.
But looking at base metals as a subset of commodity stocks, the outlook seems to be pretty good for bargain hunters.
- Why I owned AA into earnings, and will hold until it hits $9. (The Slant)
- Gold miners continue to face a cave in. (MarketWatch)
- More bad news in China: Trade data is worse than expected. (NYT)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he was long position AA.