The Momentum Investor: Spotlight On BHP
Summary
- The manufacturing sector, which creates demand for BHP's raw materials, is very strong globally.
- Analysts are bullish on the stock.
- The basic materials sector is improving relative to the S&P 500 and the stock's chart has positive momentum.
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The momentum investor's sole purpose is to identify stocks that are positioning for a price breakout for either fundamental (a new product, a merger), economic (strong sector growth), or market-based (an industry that is gaining in strength with traders), reasons (or a combination of the three). The column will focus on industry fundamentals, basic financials, and charts to make its determination.
This is a high-risk strategy and should only be used by traders who can lose a substantial amount of money. This column is not specific investment advice for any individual.
BHP is a member of the basic materials sector:
BHP Group engages in the natural resources business in Australia, Europe, China, Japan, India, South Korea, rest of Asia, North America, South America, and internationally. It operates through Petroleum, Copper, Iron Ore, and Coal segments. The company engages in the exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal. It is also involved in mining, smelting, and refining of nickel; the provision of towing, freight, marketing and trading, marketing support, finance, administrative, and other services; and potash development activities. The company was founded in 1851 and is headquartered in Melbourne, Australia.
They are one of the largest companies in that sector.
BHP provides raw materials for manufacturing companies. For BHP to grow, the manufacturing sector needs to be strong. That is the current case.
Global manufacturing is doing well (emphasis added):
The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – edged down to 54.2 in November, little-changed from readings achieved in the prior three months. The headline PMI has now signaled improvements in business conditions for 17 consecutive months.
All five of the PMI components were at levels normally associated with positive trends in operating performance. Output, new orders, employment and stocks of purchases all continued to expand. Vendor delivery times also lengthened sharply, mainly reflecting the ongoing severe strain being experienced across global supply chains.
All three of the sub-sectors covered by the survey (consumer, intermediate and investment goods) registered PMI readings above the neutral 50.0 mark in November.
Of the 30 nations for which latest data were available, 26 saw expansions and four (China, Brazil, Mexico and Myanmar) registered contraction. The euro area remained a bright growth spot, with four of the five highest ranked countries (Italy, the Netherlands, Ireland and Greece) located in the currency bloc. The US was in sixth position overall.
The latest ISM report on manufacturing indicated the US manufacturing sector was in its strongest position in decades (the author has permission to use the most current ISM report):
The data is structured so that the 50 level separates expansion from contraction. A reading of 60 is considered strong.
Other data adds additional detail:
New orders for durable goods bottomed at the end of the recession but are now near 5-year highs (chart from the FRED system).
Industrial production has also rebounded (chart from the FRED system).
Because demand for industrial goods is strong, analysts are bullish on the stock.
Three Seeking Alpha authors are bullish while one is neutral
Wall Street analysts are also bullish according to the Seeking Alpha page.
The basic materials sector is positioned to outperform the S&P 500:
Above is a relative rotation graph for the 11 major sectors versus the S&P 500. It uses weekly data, so it will move a bit slower. However, the basic materials sector is now in the improving sector. The chart above uses 10-week tails. Assuming the index continues on its trajectory, it should be in the leading quadrant in 10-12 weeks (chart from StockCharts.com).
Finally, let's look at the chart:
1 1/2-Year chart of BHP with the BHP/SPY ratio (top panel); MACD (1st panel below price); Price Percentage Oscillator (2nd panel below price): Chaikin Money Flow (3rd panel below price). From StockCharts.
The stock printed a triple top in 2021. After completing that formation, the stock gapped lower as traders took profits. In October and November, it printed a double bottom. Currently, the MACD and PPO are rising and the CMF is showing a positive inflow.
Let's review:
There are strong fundamental reasons supporting this company. Demand for manufactured goods is at its strongest level in decades. This strength is global in breadth. There are also technical reasons: the basic materials sector is gaining strength relative to the S&P 500, the chart just printed a double bottom, and the momentum indicators are rising.
That being said, the reader is again cautioned that his is a high risk strategy that should only be performed by those with a very high risk tolerance.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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