On Wednesday, we saw a disconnect between the price of copper and one of the world's leading copper producers Freeport McMoran (FCX). Copper futures have been rising steadily the past few days and are approaching overhead resistance, looking to breakout. Yet, during this rise in copper prices, you will notice that the copper producer FCX was beaten down in the market. So, we seem to have a disconnect here. If you take a look at copper futures, you'll notice an area of strong overhead resistance. If it breaks this to the upside, copper could really take off. We're talking about a multi-year ascending triangle building here.
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Then, compare this with FCX and you see a tale of two charts. FCX is now bordering on its 200-day moving average and I like it down here. Technically, the stock has been in a long uptrend and is a direct beneficiary of high copper prices and growing copper demand. In addition, to top it off, FCX has the added bonus of exposure to molybdenum, a metal hardly anyone knows about. I would be remiss if I didn't mention that Atticus Capital has a large stake in FCX. Atticus is the 13th largest hedge fund in the world based on assets as recently cataloged by Alpha, which I posted about here. Moreover, you can read more about Atticus Capital's portfolio holdings in the 13F analysis I did here.
Even if the selloff in FCX continues, I'm buying here because:
- Copper prices are high and look to go even higher.
- FCX is one of the best copper producers out there and benefits from higher prices.
- FCX has exposure to molybdenum.
- IFCX is cheap on valuation as it trades at only 13.1 times trailing and 8.6 times forward earnings.
- The company still is cranking out operating margins of 42% and a return on equity of 20.4%.
- Each time the stochastics have reached oversold levels, FCX has presented us with a buying opportunity, and that's exactly what is about to take place. If you look at the chart of FCX below, you will see the green circles on the main chart highlight the buyable dips. On the bottom of the chart, you will notice those buying opportunities coinciding with oversold stochastic levels.
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Therefore, the action we saw yesterday was very puzzling to say the least. There was a clear disconnect between the price of copper and the copper producer FCX. I believe this is because we have reached the stage in the market sell-off where even the market leaders are taken behind the woodshed and beaten. All of the weaker sectors have already sold off and now it is time for the strong sectors to be taken down.
After all, we're in bear territory. We saw this same scenario play out a few months ago when energy, commodities and the like all saw massive selling. In addition, after massive run-ups, we're back to the rinsing cycle of the rinse and repeat strategy. Watch FCX as it should provide a solid entry for a longer-term investment. We may see continued selling because hedge funds and the like are seeing redemptions and have to scrounge up cash to give back to their investors who want out. Moreover, when you're short on cash, you have to sell your winners, which is exactly what they're doing.
Copper prices are rising and are close to really breaking out. Although Freeport McMoran Copper & Gold Inc has the word 'gold' in it, don't let that fool you. Copper is its game. Toss in the fact that the company has exposure to molybdenum (think steel alloys), and this miner truly has exposure to some booming industries. Take advantage of the disconnect that exists here between FCX and copper prices, since it benefits from these higher prices, and hedge funds and the like still are forced to sell their winners due to redemptions. Their loss is our gain.