Freeport-McMoRan: Time To Take Some Chips Off The Table In The $13-14 Range

Dec. 13, 2019 6:08 AM ETFreeport-McMoRan Inc. (FCX)48 Comments37 Likes
Vladimir Zernov profile picture
Vladimir Zernov
16.17K Followers

Summary

  • Freeport-McMoRan shares rise on copper price upside and hopes of a U.S.-China trade deal.
  • Meanwhile, earnings estimates decreased compared to October levels, when the stock was trading in the $9.00 area.
  • While I believe that the long-term path for both copper and Freeport-McMoRan is to to the upside, now is the time to take some profits after a major run.

Back in October, I wrote that Freeport-McMoRan (NYSE:FCX) shares were a speculative buy around $9.00. At that time, I believed that the attractive valuation and positive technicals made Freeport a good speculative play. The stock has gone a long way since then, and it’s high time to revisit the thesis.

The end of the year is near, and we can safely say that recession fears did not materialize in 2019. Despite all kinds of trade wars, tariffs, etc., the world economy is showing that it has material underlying strength and continues to grow. Copper prices are finally starting to reflect this reality, providing support for Freeport-McMoRan and other copper stocks:

Interestingly, earnings estimates for Freeport-McMoRan actually dropped for the period of 2019-2023, all while the stock was on the rise. However, the company does not look very expensive even with lower earnings estimates and increased stock price.

Source: Seeking Alpha Premium

When I wrote my October article, Freeport-McMoRan was trading at 13 forward P/E for 2020 and 6 forward P/E for 2021. The forward P/E numbers have now increased to 23 and almost 10 respectively. In my opinion, this happened due to the material undervaluation of Freeport shares when they were trading near the $9.00 level rather than due to any dramatic change in the underlying fundamentals. The market initially pushed Freeport shares to yearly lows on irrational fears regarding the impact of trade wars on the world economy and copper demand, and is now simply taking Freeport back to more normal levels.

Currently, I see no signs that recession will materialize in 2020, and therefore, I’m positive on copper price perspectives for the next year. The market is excited about the progress in U.S.-China negotiations, so the copper price might have some more room to run in the near term. My long-term view on copper remains bullish due to continued growth of the world economy and scarcity of big-scale, world-class copper deposits which will ultimately lead to material tightness in the copper market.

At the same time, Freeport-McMoRan shares gained roughly 50% from the lows reached in early October. This is a very material move for a company of Freeport’s size that happened in a matter of a few months. Freeport shares are an easy and popular way to bet on copper price upside due to the company’s strong assets and the stock’s liquidity, so more upside on the copper front may lead to more immediate upside in Freeport shares as those who missed the boat try to get in and participate in the move. However, the major change in the valuation level in the absence of a corresponding major shift in fundamentals will ultimately lead to a rapid unwinding of a momentum trade, resulting in what can be a material pullback for Freeport stock.

Stocks rarely go up in a straight line, and Freeport shares haven’t had any material pullback since the stock breached $8.50. I believe that the $13.00-14.00 level is a good area to take profits for those who’ve enjoyed the trade. The stock is getting stretched technically, the next year is a second transition year for the company, while the forward P/E for 2021 is coming close to 10 - a level we haven’t seen for quite some time. For additional upside, earnings estimates will have to go up, and this will take some time even in a favorable scenario.

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This article was written by

Vladimir Zernov profile picture
16.17K Followers
I'm a trader who trades both short-term and long-term. I started my career as a day-trader for a trading firm, but then turned to longer time frames and went on my own to manage my portfolio. I use technical analysis as well as fundamental analysis in my research.
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Disclosure: I am/we are long FCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.

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