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Jhe best investors are adapting to the current market environment. Like an offensive playmaker, they successfully adapt to what the other side (the market) is doing by targeting the right areas and executing the right strategies.
On Wednesday, the US Department of Labor released its updated CPI which showed inflation rose 7% in December from a year earlier, the fastest pace since 1982. Although this was widely expected , the rate of change shows how large the price increase has become. :
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In this market environment, which investments are likely to outperform?
Consumer demand is still strong and the inflationary pressures that mounted last year are likely to persist into 2022. A few 25 basis point Fed rate hikes may not be enough to counter rising costs. While the US consumer is doing well and the economy can handle modest rate hikes, the damage has already been done.
It seems everywhere you go people are talking about price increases. From foodstuffs to oil and gasoline to raw materials, prices have skyrocketed across the board. A short list of products presented below is indicative of this situation. Since March 31st in 2020, aluminum increased by 67%, copper by 84% and coal prices by 154%.
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As a historical hedge against inflation, commodity stocks have outperformed over the past year and should continue to do so in the first months of this year. Although investing directly in commodities can be lucrative, decades of market history have shown us that it is far more profitable to own stocks of companies that produce commodities than the commodities they produce. . We can even see a more recent example of this, highlighted by the three companies we’ll talk about below:
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The SDPR S&P Metals and Mining ETF XME has climbed more than 200% over the same period and is currently within striking distance of a 52-week high. XME contains the three companies that we will analyze. These three companies represent approximately 13.63% of the total holdings of the SPDR S&P Metals and Mining ETF. While XME has taken a break from a consolidation pattern over the past few months, the ETF looks set to continue its short-term outperformance.
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Freeport-McMoRan Inc. (FCX)
Freeport-McMoRan is a leading international mining company with operations in North America, South America and Indonesia. FCX mainly explores copper, gold, molybdenum, silver, as well as oil and gas. Incorporated in 1987 and based in Phoenix, AZ, Freeport-McMoRan operates approximately 165 wells worldwide.
FCX should benefit from the progress of its exploration activities which will allow it to increase its production capacity. Rising copper prices should also support corporate margins. FCX is poised to benefit from the international push for EVs, which is positive for copper as EVs are copper-intensive.
FCX has exceeded earnings estimates in nine of the past ten quarters. Trading at a relatively undervalued forward P/E of 10.77, the stock has largely outperformed the market since the market bottom in March 2020. FCX recently reported EPS of $0.89, a surprise from +14.1% compared to the consensus. Over the past year, FCX stock has risen 46.48%.
FreeportMcMoRan Inc. Price, Consensus and EPS Surprise
What the Zacks Model Reveals
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently experienced positive earnings estimate revision activity. This more recent information has proven to be very useful in finding positive earnings surprises, giving investors a head start during earnings season. In fact, combining a Zacks No. 3 or higher ranking and a positive earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
With a Zacks #3 ranking and +1.74% revenue ESP, another revenue beat could be in the cards for FCX when the company reports on January 26.and. This will be the last set of quarterly earnings data for 2021. For the year, revenue is expected to have risen 65.09% to $23.44 billion. Analysts expect EPS of $3.14, which would translate to 481.48% growth over 2020.
Reliance Steel & Aluminum Co. (RS)
Reliance Steel & Aluminum is one of the largest metal service center companies in the United States. RS supplies aluminum, alloy, brass, copper, steel and titanium products to the general manufacturing, non-residential construction, transportation, energy and defense sectors. The company operates more than 300 metal processing and distribution facilities in 40 states, as well as 13 in other countries. Reliance Steel & Aluminum was founded in 1939 and is headquartered in Los Angeles, California.
RS, a strong #1 Zacks buy, continues to grow through strategic acquisitions and the expansion of existing operations. The company has made 59 acquisitions since its IPO in 1994. The purchase of Metals USA added approximately 48 service centers located across the United States, while the takeover of Tubular Steel boosted the company’s product portfolio. business and end market diversification. Rising metal prices are expected to boost RS performance this year.
Even with the recent rise in its stock price, RS is trading at a forward P/E of 11.04, indicating that the stock is still relatively undervalued. RS has beaten earnings estimates in each of the past eleven quarters, most recently recording a 3.54% beat in October when the company reported EPS of $6.15. RS stock is up more than 27% in the past year.
Reliance Steel & Aluminum Co. EPS Price, Consensus and Surprise
Analysts covering RS have raised their 2021 EPS estimates by 2.91% over the past 60 days. Zacks’ consensus estimate now stands at $20.48, translating to 165.63% growth over 2020. We’ll see if RS can live up to the lofty expectations when the company releases its final details. on the EPS of 21 on February 17.and.
Arch Resources, Inc. (CAMBER)
Arch Resources produces and sells metallurgical and thermal coal from surface and underground mines. ARCH sells its products to industrial, utility and steel producers in the United States, Europe, Asia, Central and South America and Africa. The company owns or controls more than 700,000 acres of coalfields nationwide and operates seven active mines. ARCH was founded in 1969 and is based in St. Louis, MO.
ARCH is heavily undervalued (2.59 forward P/E) and has generated a 10.98% earnings surprise over the past four quarters. The company recently reported EPS of $4.92 in October, a surprise of 3.8% from consensus. ARCH stock is up nearly 88% in the past year.
Arch Resources Inc. Price, Consensus and EPS Surprise
EPS projections look favourable, with the Zacks consensus estimate predicting growth of 178.8% to $17.92 in 2021. Looking to this year, analysts forecast further EPS growth of 109.29% at $37.50. We’ll see how the EPS 21 consensus matches up when the company releases its final quarterly list on February 8.and.
The infrastructure stock boom will sweep America
A massive push to rebuild America’s crumbling infrastructure will soon be underway. It is bipartisan, urgent and inevitable. Billions will be spent. Fortunes will be made.
The only question is “Are you going to get into good stocks early when their growth potential is greatest?”
Zacks released a special report to help you do just that, and today it’s free. Discover 5 special companies looking to make the most of building and repairing roads, bridges and buildings, as well as transporting goods and transforming energy on an almost unimaginable scale.
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FreeportMcMoRan Inc. (FCX): Free Stock Analysis Report
Reliance Steel & Aluminum Co. (RS): Free Stock Analysis Report
SPDR S&P Metals & Mining ETF (XME): ETF Research Reports
Arch Resources Inc. (ARCH): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
