It is blatantly obvious that the commodity trade is back, with many of the oil plays moving higher and any company with exposure to metals doing the same. Gold broke through the $1700/ounce level on Friday and although it is weaker this morning we feel that we are not in danger of breaching that important psychological level on the way down - at least anytime soon. Deals are starting to pick back up in the commodities arena and previous deals are getting richer as acquirers look to close deals which have not closed and appear doomed because investors are unhappy with valuation.
We want to stress this morning that the market is not out of the woods yet and that buying across the board is still not the way to go. We maintain that purchasing companies with strong management teams and balance sheets is the way to go and for good measure their production numbers should be growing as well. This is why we like oil companies right now, but as soon as it appears that all boats will be lifted with rising tides, we shall be quick to rotate to a more aggressive stance with our portfolio.
Our recent call on AuRico Gold (AUQ) seems to be playing out quite well, but this small short-term gain is not the whole story. Shares have bounced back up into the $6/share area, but we think that shares are worth somewhere between $12-15/share in the next 12-18 months. Our logic is that if they can get operating results back to meeting market expectations then we see a rise based on operating results alone and should operating results not meet market expectations then investors would get bought out by someone wanting the assets. Just so that there is no confusion here, we are not playing this for a buyout as we have said numerous times that is a fool's game, but rather based on the value presented to us with shares at this time. Investors are presented with an interesting proposition with AuRico and within the gold miners it might very well present one of the best value plays in the market today.
We discussed a "China Trade" in Friday's article and we saw some impressive gains after the market opened. Freeport-McMoRan (FCX) was the big winner among the large cap plays as it rose $3.09 (8.50%) to close at $39.43/share. Our repeat readers will remember that we have stated that $40/share shall be the next important area for the shares moving forward. If we had to handicap the potential damage from the tax issues in Asia and Africa we would throw out a 10-15% downside risk on that news for investors. Working with that should give investors an idea of a better risk/reward scenario here. With the news flow turning we are beginning to move bullish on all things commodities.
Our other highlighted stock on Friday was Vale (VALE) and it performed quite well with 42 million shares traded and the stock rising $1.14 (6.75%) to close at $18.03/share. China's stimulus plan is nice for markets and really lit up the tape on our commodity stocks on Friday, but it will merely ease the fall of iron ore prices until the world economy begins to improve. In our opinion shares should probably trade no higher than $22/share in the next six months and getting through the $20/share level will be tough enough.
Another iron ore play, with coal exposure as well, rose significantly after having fallen pretty hard as of late. Cliffs Natural Resources (CLF) closed at $39.91/share after rising $5.05 (14.49%) on volume of 16 million shares. The company will be a great play on a resumption of GDP growth in China and the rest of Asia as demand for commodities grows in order to build the infrastructure needed to bring that area of the world into line with the developed world. This is a highly levered play, and one we will look at further as we get a better handle on the outlook for the world economy moving forward.
Alpha Natural Resources (ANR) saw shares rise $0.99 (16.75%) to close at $6.90/share on volume of 37.8 million shares. We are seeing a bounce off of all-time lows for the shares, so the volatility here is to be expected with the good news of central bank easing and heavy coal consumers initiating stimulus packages. Long-term we think that this trade will play out, but among all the places to put money today this would be the last, that is of course until we see confirmation on the chart that it is time to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.