By Jonathan Chen
Copper has been on a nice uptrend recently, and it just broke out on the daily chart, seen here. Copper is so important because it's used in everything, from housing to industry to automobiles to electronics; that's why economists have given it the nickname "Dr. Copper." Excluding earlier this year, copper is the highest it's been in years, and it looks poised to break the $4.50 per pound mark ... which can potentially lead to $5 copper, something we have never seen.
As such, the related equities and ETFs are moving with it. Names like Freeport-McMoRan Copper & Gold (NYSE:FCX) and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEARCA:JJC) are both sharply higher today, up 4.5% and 2.5%, respecitvely.
Freeport is generally the most common barometer of copper and industrial use amongst commodity-related equities, as the company is the world's largest seller of copper. With shares trading at under 9 times forward earnings, and sporting a 1.9% dividend yield at these levels, it looks as if copper -- and thus, Freeport-McMoRan Copper & Gold -- is not overvalued by any stretch of the word. The company trades at 0.7 times earnings growth, although miners tend to trade below market multiples, as analysts are generally skeptical of the commodity bull cycle, and have been for some years.
Perhaps it is time for that to end, with copper breaking out to new daily highs. If FCX were given a market multiple, say 13 times earnings, there is significant upside from these levels for copper, and thus the related equities.
Other names to consider in this group are Southern Copper (NYSE:SCCO) and Vale (NYSE:VALE), which are also large copper miners. Exposure to Vale gives you exposure to other metals, while Southern Copper and Freeport are pure plays on copper.
Bullish: Traders who believe that copper is likely to continue to move higher might want to consider the following trades:
- Going long copper futures at these levels could prove profitable once we cross the $4.50 per pound mark.
- Going long the copper ETF gives traders direct exposure to the good Doctor, but it allows traders not comfortable with trading the underlying issue direct exposure.
- Lastly, traders can also go long the related equities, such as Freeport or Southern Copper.
Bearish: Traders who believe that copper is likely going to peak here may consider alternate positions:
- Going long the U.S. dollar, perhaps by buying the dollar ETF (NYSEARCA:UUP) could prove profitable, as the dollar and copper tend to move inversely of each other.
- Shorting the above-mentioned names or buying puts in the option markets on these names could be profitable should copper come down hard here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.