Freeport, Alcoa: The Rise Before the Fall?

Citi analysts have upgraded their recommendations on Freeport- McMoRan and Alcoa, but some investors are cautioning a downward trend for base metals prices looms.
By Andrea Tse ,

NEW YORK (

TheStreet

) --

Citi

(C) - Get Report

analysts just upgraded their recommendations on

Freeport-McMoRan

(FCX) - Get Report

and

Alcoa

(AA) - Get Report

, but investment research company Waverly Advisors cautions a downward trend for base metals prices.

Citi commodity analysts have upgraded Freeport-McMoRan to buy, citing an "attractively valued stock." Their target price for Freeport has increased to $95 from $85.

The Citi analysts write that Freeport shares are still trailing the S&P by 8% year-to-date and that its low cost mines and cash costs of $1.35 per pound has led them to estimate that the company can generate free cash flow equating to a 10.2% yield. They add that Freeport's management has a history of raising dividends and declaring special dividends during profitable years.

Meanwhile, Citi has also upgraded Alcoa to buy while maintaining a $17 price target. "We believe AA is attractively valued again after the recent share price decline," Citi analyst Brian Yu wrote in a note to investors.

The analysts believe that Alcoa is currently trading at a discount and is undervalued relative to the company's mid-cycle earnings power. They are raising their 2010 earnings estimate for Alcoa to 72 cents from 65 cents and 2011 estimate to $1.10 from 80 cents.

Freeport-McMoRan is currently trading up 0.7% at $72.10 and Alcoa has risen 2.9% to $13.70.

Despite the bullish views on commodities and commodity producers, one investment research and asset management company warns that the bullish trend in base metal prices is nearing an end; on Monday, Waverly Advisors published a report saying that two main factors powering the bullish copper trend of the past 12 months appear to have run their course.

They include the weakening U.S. dollar driving investors to seek out cheap or hard assets and a China-led recovery of the developing world economies helped by the country's massive stimulus.

But Waverly Advisors points out that the U.S. dollar, which was weighed down by expanding debt and a weakened economy, is starting to recover as the U.S. economic situation begins to look less dire. Last week's GDP reading for the fourth quarter was one indication of this.

The Waverly report adds that China's economy, a crucial driver of global metal prices,

is heading towards a cooler period.

With Beijing's recent steps to cool surging credit in the country, capital investments there could wane, the report points out.

"In a deflationary global vacuum this will be a catalyst capable of reversing copper's bullish price trend," the report says. "The fundamental bearish signals are strengthening." Waverly points out that a week ago copper remained in a clear, strong uptrend, but that last week's market action broke that pattern.

"Though this is a warning sign for the bulls that the trend may be weakening, it is also important to respect the power of a trend, which can often carry values far beyond what fundamentals can support," the report says.

Meanwhile, Waverly notes that aluminum has shown sustained strength in China's domestic markets, buoyed by bullish commentary from

Aluminum Corp. of Chin

(ACH) - Get Report

and other producers. The reports subsequently notes, "clearly we are still very early, but emerging data confirming our thesis is becoming increasingly compelling."

Aluminum Corp. of China ADRs are up 1.1% at $26.10.

Meanwhile, copper producer

Southern Copper

( PCU) has added 2.1% at $29.20.

-- Reported by Andrea Tse in New York

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