4 Unbelievable Stock Charts: Freeport-McMoran, Alcoa, Peabody and Goldman Sachs

The opening this morning was destined to be poor given the jump in jobless claims, but there are several stocks in particular that have gone cliff-diving in a way I can’t truly comprehend.

First let’s look at Freeport-McMoRan (FCX), which is down about 11% this morning. Yes, copper continues to trade down this morning (currently about 4% down in the futures market), but FCX is now about 1/3 of book value and yields 11%:

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I’ve included the 20 and 50 sma, even though the company barely shows up on the chart anymore. The slope of the lines alone is stunning. FCX’s total debt load is less than $7b, and none if it is really due for another six years.

Next up is Alcoa (AA), another resource name that is seeing steep declines in the futures market. Aluminum is down modestly this morning (2.4%), but Alcoa like FCX has minimal debt loads, strong current account balances, and now goes for about a third of book value. Neither of these companies deserves to have revaluations to the tune of 75% in less than three months:

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I continue to have the most fear of all over the fact that the sideline capital that is fundamentally-focused has yet to step into these markets. If and when they do, these two names should find strong support. It’s not about the commodity prices anymore. Shut down all the plants for six months, and it still doesn’t breach the margin of safety required to find at least $2 of assets for every investment dollar.

Peabody Suffering From Crude

Coal producer Peabody (BTU) is, as I’ve stated earlier, an ancillary to crude oil prices, especially in a market environment with little forward information. But Powder River Basin coal has actually held up in price over the past weeks, unlike northern Appalachian coal. I don’t think this fact is being represented in BTU shares, but that’s at the relative bottom of a long list of “un-discounted” information:

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And finally, ole’ Goldman Sachs (GS), the stock quickly making myself and Warren Buffett look like knife jugglers. GS’s continued decline I still see as the market anticipating further shoes to drop (tail risk barometer) in the the broad category I’ll just call “financial assets.” The fact that Congress is a few days away from the end of their year (as I bite my tongue) is also spooking markets, as yet another potential backstop and catalyst exits from the market environment.

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Parting Shot:

I’m going to make like a pig in the mud today, and just cover myself with the worst-performing crud in the Secular Trends Portfolio. The most important function any of us can do is to stress-test our core holdings in the most dire of potential scenarios. Our economic indicators are setting records left and right, and we need to approach our analysis with the same broad universe of potential outcomes.

Disclosure: Author does not hold positions in the companies mentioned.

Comments

[najdorf:]

You might be right about FCX having a comeback, but you're wrong that commodity prices don't matter. The company is completely levered to commodity prices. What is their book value constituted of? Inventory, property, plant & equipment, and goodwill (not much cash on hand). The inventory consists of commodities and commodity-derived products. The properties, plant and equipment are valuable for no reason other than that they produce commodities (remote Indonesia? desert in the American SW? Congo?). The goodwill is from acquisitions of other companies equally levered to commodity prices - what's this worth if they have to shut down the mines they acquired?

Come on. If your only business is selling copper, gold, moly, etc. and the price of those items declines, your earnings will decline. If they decline far enough you'll go bankrupt. What kind of liquidation of FCX's assets could you run in this climate? You really want to bet that there's anything left over for equity-holders if we don't see a commodity comeback? The only thing keeping FCX afloat is that they come across some gold while mining minimally profitable copper.

2008 Nov 23 03:40 PM

[Ryan Barnes:]

Naj,

I don't contend that copper, gold, and molybdenum prices aren't core drivers of equity prices and book value. But copper is down 62% from its peak, while FCX shares are down over 80% from peak. Moly and gold pricing have obviously held up much better.

I always subtract goodwill from my calculations. There's only about $6b of it, and if you yank it out of the picture FCX is still just .5 book. It's all about risk and reward, and I think the balance is tiled towards investors' favor at current prices.

Best,

RB

2008 Nov 24 05:43 AM