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Summary

  • The market has staged a huge rally over the past five years, both in equities and real estate.
  • One of the few stocks that has not participated in the impressive rise in the markets is the huge miner Freeport-McMoRan.
  • However, there are myriad reasons to believe that the miner's recent rally will continue and the shares will make up for lost time over the next few years.

It has been a very disparate five years since the recession ended in June 2009. On one hand, both economic and job growth have advanced at very tepid rates. In fact, judging by these factors, this is easily the weakest of ten post-war recoveries on record.

GDP growth has average ~2% annually over the past five years, far under the over 4% annual GDP growth usually seen in the first four years off a recession. There was an excellent piece in the Wall Street Journal today on how well-intentioned redistributionist policies have become a core driver behind this anemic recovery over the past five years.

On the other hand, the equity and real estate markets have soared. This has been in good part due to the easy money policies of the Federal Reserve, a bounce off generationally low levels and also an earnings rebound as S&P companies have achieved historically high profit margins. The downside to this five-year rally in the market is there are few sectors and stocks that have not fully participated in the rally, and the market overall feels like it is in slightly overvalued territory.

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One stock that has not participated in the rally off the lows in the market to any extent is Freeport McMoRan (NYSE:FCX). I recently added the shares to my income portfolio, as it pays a dividend yield of 3.6%, over 40% more than yields available on ten-year treasuries currently. I also believe the shares are heading higher over the next 12-18 months, for myriad reasons.

First of all, the stock is behaving much better recently, from a technical perspective. The shares have successfully and sequentially moved over their 50-, 100- and 200-day moving averages over the past couple of months (See Chart).

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Second, over the past several years, the company has made purchases to diversify into oil and gas production in North America. This gives it an avenue of growth by hitching its wagon to the continuing energy production boom from shale resources in the United States. It also has offshore acreage in the Gulf of Mexico, which is rebounding over the past few years after the Macondo disaster in 2010.

In addition, most of the company's non-macro problems over the past few years have originated from its huge mining complex in Indonesia. The company has diversified enough so Indonesia only makes up ~20% of overall revenues. The company now gets roughly two-thirds of its copper production recently from North and South America.

Freeport could also benefit from a new government in Indonesia after upcoming elections, and/or some lessening in new rules requiring production to be smelted within the country in coming years. Finally, I would not be surprised if Freeport eventually sells these assets, which would lift an overhang on the stock.

As the global economy hopefully picks up in the second half of the year, the company should benefit from increasing demand for its core commodities, especially copper.

Finally, the shares are not expensive here. The stock is selling at under 15 times trailing earnings, a slight discount to the overall market. It is much cheaper-looking, at peak earnings of over ~$4.75 a share the company made in 2011. Revenues should grow in the low teens for both FY2014 and FY2015, and earnings are projected to jump ~20% year-over-year in 2015. Insiders have also been net buyers in the stock over the past year. ACCUMULATE

Source: Finally Time For Freeport McMoRan