Guide to Base Metal Stocks for 2010

NEW YORK (TheStreet) -- Based on the risk-adjusted performance of base metal stocks during the past six months, we believe that selloffs in these stocks was largely overdone on economic concerns: Vale(VALE), BHP Billiton(BHP), Rio Tinto(RTP), ArcelorMittal(MT), Steel Dynamics(STLD) and POSCO(PKX).

We believe these stocks will stage a strong rebound in the upcoming weeks on bargaining opportunities, revisions in earnings estimates and price multiples. However, recent concerns related to slowing metal demand from China may offset the bargaining opportunities.

In view of the current high volatility in the stock markets, we studied the performance of metal stocks in an attempt to provide insights into risk-adjusted returns during the past six months. A longer period may not reflect the current financial and operational efficiencies of the companies, as they may have changed through the restructuring efforts during the financial crisis.

We have considered the following parameters for the U.S. listed base metal stocks in order to measure risk-adjusted performance.

Alpha for six months: Alpha measures abnormal return of a stock over the theoretical expected return adjusted to the relevant risk called Beta.

Beta for six months: Beta for a stock represents the relation of its returns with that of the financial market such as S&P 500 index. All metal and mining stocks have a positive beta, meaning that stocks generally follow the market.

Current dividend yield: Estimated earnings per share for 2010 and 2011. Estimated long-term EPS growth rate and dividend yield.

Multiples: We considered several, such as price-to-earnings and EV to EBITDA.

Big Three Mining Stocks

BHP, Vale, and Rio Tinto with respective equity betas of 1.50, 1.53 and 1.63, underperformed the S&P 500 index on a risk-adjusted basis by 4.45%, 0.32% and 0.41%, respectively. These stocks are currently trading at attractive P/E multiples of 13.2, 7.8 and 6.9, respectively, compared to the S&P 500's 15.1.

On Wednesday, UBS(UBS) upgraded Vale to "Buy" from "Neutral" on reasons that the risk-reward profile looked compelling, and the shares have corrected too much in the recent weeks. The stock has 12 buy, 5 hold, and no sell ratings, according to TheStreet's Analyst ratings guide.

BHP has 7 buy, 2 hold, and no sell ratings, while Rio Tinto has 7 buy, 3 hold, and no sell ratings, according to TheStreet's Analyst ratings guide.

Steel Stocks

Major steel stocks AK Steel(AKS), ArcelorMittal, POSCO and Steel Dynamics underperformed the S&P 500 on a risk-adjusted basis by 26.5%, 24.2%, 18.9% and 13.0%, respectively.