Commodity stocks that rise in the fall
In a market that isn’t behaving like it’s supposed to, this Canadian analyst finds several commodity stocks that are behaving very well.
Things aren’t going as expected. And that’s good.
Anyone who reads the financial media undoubtedly saw the phrase “September is historically the worst month for the stock market” repeated many times over.
Yet on the whole, the market is up. Let’s face it, nothing has been quite the same lately, so maybe we should take all the old phrases and throw them back into the Scrabble bag.
The question is, if investors don’t know what to expect, what should they do?
Go ahead and ride a few winners, says Ms. Jennifer Dowty in Investor's Digest of Canada. This Assistant VP and portfolio manager at MFC Global Investment Management takes a look at what’s doing well.
This being Canada, one class of stocks that is doing particularly well is commodities.
And she recommends two commodity stocks that keep going up — way up — but don’t appear to have hit their ceilings yet.
A complete reversal
Whether or not we are officially out of recession, there is plenty of light in the tunnel, says Ms. Dowty. U.S. economic data is generally pointing in the right direction.
“This suggests that global economic conditions will re-accelerate in 2010,” she adds.
As for the September swoon, it hasn’t really happened, despite a few sharp down days in the market.
Technically, the S&P/TSX Composite Index rally is strong, this analyst informs us. It broke through what the technical analysts call “resistance” at 11,065. It opened today at 11,338.
As September draws to a close, it appears to be a complete reversal of last year (when it was way off). This is positive, of course, but it “would likely catch many investors off guard,” she remarks.
Attractive takeover target
In order to remain on guard, it helps to know where the hottest opportunities are to be found. Some of the biggest winners in this market rally have been commodities, says Ms. Dowty.
Surely that’s one investment adage we can count on — that commodities will be in big demand as an economic recovery heats up.
At any rate, this analyst has two commodity stocks that have risen so sharply you might think there was no more room to grow. She begs to differ. They still have “material upside potential.”
The first is Mercator Minerals (TSX-ML), which explores and mines copper, molybdenum and silver in Nevada. It has one very appealing prospect for investors.
“The company is an attractive takeover target,” the analyst explains, “given its assets and diversified commodity exposure.”
The company’s main asset is 100 per cent owned Mineral Park. The mine has a life of some 25 years and production costs are low.
Mercator recently raised $70 million in the equity markets at $2.60 a share and will use the proceeds to complete its mill expansion. Copper production will grow from 10 million pounds last year to over 60 million in 2011. Not least, the company is expected to report a profit for the first time in the third quarter.
And how far has the stock climbed? Try 550 per cent so far this year! “However, analysts on the street still believe there are further gains to be realized,” says Ms. Dowty. Of the eight analysts that cover it on Bay Street, seven say “buy”, while one cautious holdout says “hold.”
If metal prices remain strong, the analyst concludes, this stock has more ladder to climb. It trades today at $2.80, about 20¢ above its price when Ms. Dowty was writing. The average one-year target price from the analysts is $3.46.
Seven buys
There’s more copper and molybdenum coming out of the ground at Taseko Mines (TSX-TKO). This firm is also developing a copper-gold project.
Like Mercator, it operates in North America, in this case British Columbia, and it also keeps its production costs low.
Next year, Taseko forecasts production of 80 million pounds of copper and 800,000 pounds of molybdenum. Expected mine life is 26 years.
Earnings are projected to rise considerably in the next year. But this company does have one stumbling block. It has hedged 50 per cent of its copper production through May 2010, a prudent gesture in the midst of the recession, but a bit of a ball and chain when prices are improving.
This means the stock is lagging its peers and trading at a discount. Yet its share price has risen more than 300 per cent this year! And all seven analysts who cover it on the Street have it as a buy.
Taseko is trading at $2.75, just below what it was when Investor's Digest of Canada went to press. The analysts’ average one-year target price is $3.30.
September is almost over. But as far as this analyst is concerned, the reversal of form that it brought to the market may be the beginning of even better things to come.
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