Vale(VALE) - Get Report just pushed the Brazilian stock index to today's biggest global gain on expectations that Chinese demand for raw materials is on the rebound. The iron ore miner, along with state-controlled oil company Petrobras, led Brazil's Ibovespa, which only three weeks ago saw its biggest loss in four years. Monday on the Nasdaq, Vale was up by more than 12%.
But this stock has been troubled, having recently fallen further than 75% off its 52-week high. Is this a one-time recovery, or is Vale still a stressed-out and dangerous stock?
A rally in the Chinese stock market, spurred by news that China's top securities regulator is quitting after contributing to months of financial woes and volatility, spread to the commodities sector. China is Brazil's largest trading partner, so an improved outlook for commodities demand is a boon to Brazilian raw materials companies such as Vale. China itself has traditionally had a voracious appetite for iron ore, gobbling up 70% of worldwide production.
Vale is the world's largest iron ore miner, but it and its subsidiaries are also involved in the production of nickel, copper, manganese, platinum, and coal. Its current market cap is more than $17 billion. It seems poised to profit as China ramps up demand.
And with iron ore fetching as much as $47 per ton -- the highest since November -- Vale has been chugging along, gaining more than 20% in the last month.
However, there's a bigger downside to the company. Vale has been riddled with troubles that make it a toxic investment. Just last week, the company announced weaker-than-expected iron ore production in the fourth quarter of 2015. Output slid to 85.4 million tons, versus 88.2 million tons during the previous period. In a further display of weakness, Vale's return on equity is lower than it was the year prior and is significantly below the industry average and that of the S&P 500.
In the most recent quarter, earnings a share fell by 46.4% compared with the same quarter a year ago. Net income has decreased by 47.3%.
VALE data by YCharts
Vale's next earnings call is set for next week. The consensus expects a revenue drop of more than 30% year-over-year, to $6.3 billion. Low prices for iron ore in the final quarter of 2015 will further hurt the company's bottom line.
Also, the current Chinese rally isn't expected to last. In fact, the growth rate for the country's economy is expected to drop from 6.9% last year to 6.5% this year. And estimates for 2017 put growth even lower, at 6.2%. A slowing economy equals fewer infrastructure investments, which equal less demand for iron ore and other raw materials.
Today, analysts at Zacks downgraded Vale to a "Sell." That sounds right.
Monday might have been a good day for the Brazilian miner, but in the long run Vale belongs to a group of troubled stocks that are destined to decline this year. The SPDR S&P Metals and Mining ETF (XME) - Get Report is up 8.09% year to date, whereas Vale is only up 1.52% YTD (and that includes Monday's rally). Vale should continue to lag its sector.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.