Analysts at Merrill Lynch predict copper prices will stay in the $3.40 to $3.80 per pound range from now through the end of 2013. (The current spot price is $3.40, down from $4.50 this past July). Based on this range Merrill Lynch's analysts think Freeport-McMoran's stock is quite undervalued. They figure the firm's mining assets are worth roughly $65 a share, and they have an overall price target of $57 a share (which is derived on a blended price-to-net-asset-value, price-to-cash-flow and price-to-earnings basis). That price is where the stock was earlier in the year, and reflects 45% upside from current levels.
The recent sharp drop in platinum, from $1,900 an ounce in mid-August to a recent $1,500 is a bit curious. Demand for the metal isn't really dependent on China, but instead is a key metal for the auto industry, which uses platinum in catalytic converters. Scarcity is the real driver here, as it is only mined in South Africa and Russia, and Russia has warned that its output will begin falling. Meanwhile, auto industry production is expected to rise the next few years.
If you're looking for a way to play the sector, then the
ETFS Physical Platinum Fund
is now at its lowest level since it was introduced in early 2010.
Risks to Consider: These commodities could fall further if the European debt crisis fails to get resolved and the major world economies are roiled.
Action to Take: Commodities go through deep bull and bear cycles. Even within these cycles, you'll spot major moves. The current pullback looks simply to be a re-entry point in a longer-term bull market, especially as it increasingly appears that the U.S. and Chinese economies -- the greatest driver of these commodities -- will not slow to the extent some had feared just a few months ago. Any of the options I mentioned above are suitable for investors to play these snapbacks, but there are other options out there as well.
>>To see these stocks in action, visit the
3 Commodities Stocks to Buy Now
portfolio on Stockpickr.
Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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