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) - Get Vale S.A. Sponsored ADR Report, BHP Billiton (BHP) - Get BHP Group Ltd Sponsored ADR Report, Rio Tinto( RTP), ArcelorMittal (MT) - Get ArcelorMittal SA ADR Report, Steel Dynamics (STLD) - Get Steel Dynamics, Inc. Report and POSCO (PKX) - Get POSCO Sponsored ADR Report.
We believe these stocks will stage a strong rebound in the upcoming weeks on bargaining opportunities, revisions in earnings estimates and price multiples. However,
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
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.
: 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.
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
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
Analyst ratings guide.
Major steel stocks
, 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.
weighed heavily on AK Steel's stock since April 2008. However,
, as the capacity utilization rates reported by the American Iron and Steel Institute on June 7, 2010 showed a rebound to the levels reported two weeks earlier.
In addition to trading around 52-week lows, stocks of ArcelorMittal, Steel Dynamics and POSCO offer attractive P/E multiples of 9.6, 10.4 and 9.7, respectively. In comparison, AK Steel,
are trading at P/E multiples of 14.3, 20.1 and 25.6, respectively.
U.S. Steel and Nucor, with respective equity betas of 1.72 and 1.13, underperformed the S&P 500 by 1.95% and 2.65%, respectively, on risk-adjusted basis. Low beta value of Nucor
, which reduces the risk of the stock.
Other steel producers,
Schnitzer Steel Industries
, outperformed the S&P 500 on a risk-adjusted basis by 40.7%, 23.0%, 12.0%, 17.8% and 2.4%, respectively.
On risk-adjusted basis,
Freeport-McMoRan Copper & Gold
outperformed the S&P 500 Index by 10.2% and 2.7%, respectively, while
outperformed the index by 1.8%.
Any rebound in copper prices due to strong growth trend in China's economy will be more beneficial to Teck Resources, which exports large amounts of its output to China. Currently, Freeport and Teck Resources are trading at P/E multiples of 7.5 and 8.7, respectively, compared to the Southern Copper's 14.6.
In 2010, Freeport, Teck Resources, and Southern Copper are set to report earnings per share of $8.1, $3.7 and $2.2, respectively, as per consensus estimates of analysts polled by
, over the S&P 500 index by 9.6% on a risk-adjusted basis during the past six months.
outperformed the S&P 500 by 1.8% and 2.4%, respectively, while
underperformed the index by 17.7%, on a risk-adjusted basis.
Return on equity of Alcoa during the past 12 months stands at -9.6% in comparison to Kaiser's 8.4%. According to consensus estimates of analysts polled by
, Alcoa is set to report earnings per share of $0.73, in comparison to Kaiser's $1.64.