The recent uprisings in Tunisia and Egypt and the conflict between North and South Korea created spikes across the board in hard commodities worldwide. Commodities whose suppliers come from regions of the world not involved in conflict are normalizing faster from the supply-concern price spikes. As such, the global price of copper has settled and continued on its upward trend due to continued demand from Brazil, India, and China with supply coming primarily from Chile.
Many companies that are closely linked to the copper industry have fared well. But investors must be careful—don’t assume that all copper plays move with copper prices. Take a look at Sterlite Industries (SLT) and Encore Wire Corp (WIRE). For both these companies, the relationship between stock price and the price of copper is lower than it expected. As a matter of fact, these two stocks over the past year have underperformed an overall well-performing sector. The moral of the story— don’t rely solely on industry and sector groupings alone for investment decisions.
Chart created using Hidden Levers app
If you think copper is going up, find the companies most highly correlated to copper prices. DUH! Instead, try Middleby Corp (MIDD), which has been well-married to copper prices for the past 10 years.
Copper is not the only commodity which has seen significant gains since the global economy has emerged from ruin. Other base metals, oil, and agricultural commodities have all risen from the ashes. Investors who can find the companies that actually benefit from the trends they envision in these groups will enjoy great gains. Be cognizant that many companies with the right fundamentals will be lackluster, even when you get the economic trend right. Fundamentals are good, but not enough. Try economic analysis!