Related Resources
Stock Research
Jubak's Journal
Recent articles:
• Whom to believe -- Buffett or Greenspan?, 3/15/2005
• The crash, five years later, 3/10/2005
• 5 stocks tapping into business spending, 3/9/2005
More...
| | Jubak's Journal
5 stocks for the energy and metals boom
Some energy and metals stocks have fallen after a sharp run-up. If you buy the right ones, you could beat the market by 20% or so over the next six months.
By Jim Jubak
Worried that you've missed out on the extraordinary run-up of energy and metals stocks? Here's how to get on board for the next leg of this rally.
It's been a great six months if you bought energy and metals stocks in September 2004.
Look at these six month returns. Canadian oil company Canadian Natural Resources (CNQ, news, msgs) is up 69% in that time, Brazilian iron ore miner Companhia Vale Do Rio Doce (RIO, news, msgs) is up 154% and oil drilling service company Transocean (RIG, news, msgs) is up 48%.
But what if you didn't buy then? What if you missed out of this extraordinary run-up? Is it too late to make a buck on the global boom in energy and metals prices?
I can't guarantee that the next six months will produce gains like those of the last six months. In fact, I doubt that the returns will be anywhere near that high. But the current run-up in commodity prices to near historic highs has led to a pullback in many energy and metals stocks that has taken the worst excesses out of the sector's prices.
If you buy energy and metals stocks that have corrected in just the right way, you stand a good chance of beating the stock market for the next six months by 20% or so. The key is to look for stocks like iron miner Cleveland-Cliffs (CLF, news, msgs) with charts where the long-term 50-day and 200-day moving averages are still in solid upward trends, but where the recent sell-off has taken the stock from the top of the price channel back toward the long-term trend line.
Making perfect sense
Now that logic may seem illogical, but bear with me. It makes perfect sense if you remember that stocks move in anticipation of future news. So energy and metal stocks moved up in anticipation that the oil and iron ore prices, to take just two examples, would soar thanks to demand from rapidly developing economies such as China and India.
Those higher prices are now here. Oil is knocking at historic highs near $56 a barrel and Companhia Vale do Rio Doce just negotiated a 72% price increase for its iron ore with Nippon Steel (NISTY, news, msgs). So investors, anticipating either that prices will drift down from here (oil) or that all the commodity price increases have been factored into stocks (iron ore), have been selling recently. In the last week or so, Companhia Vale do Rio Doce shares are down 8% and Cleveland-Cliffs' are down 11.5%. In the oil sector ChevronTexaco (CVX, news, msgs) is off 4% and Canadian Natural Resources is down 3.7%.
The buying opportunities that are catching my eye are stocks that went parabolic near the rally's end, going from steadily climbing to rocketing toward the stratosphere, and that are now falling to that steady long-term upward trend line.
You can see this using the charting tools on our site. Look at a one-year chart for Cleveland Cliffs, for example, after you've added the lines for 50- and 200-day moving averages, and for the Bollinger Bands that you'll find under the analysis menu's moving averages and price indicators tools.
The trend is your friend
On a chart like this you can easily see the steady upward trend of the 50-day moving average that indicates the stock's strength: that's the kind of technical strength that a rallying stock shows. And you can see how, beginning in early November, Cleveland-Cliffs' shares started to rise faster than that long-term trend line, and how the distance between the stock price and trend line gradually widened. In January, the stock goes into rocket mode, blasting away from the trend and heading toward and finally through the top of its long-term price channel represented by the top band of the Bollinger Band. Such a move is never sustainable for long and many investors use this kind of pattern as a sign to sell.
Around March 4, the stock began to break down toward the 50-day moving average and toward the middle of the price channel.
But notice that this sell-off hasn't dented that long-term trend. Cleveland-Cliffs is still on the same strong upward course as it has traced out for much of the last year. The recent sell-off has just eliminated the worst excesses from the stock's price. It's certainly not cheap now, but an investor buying at this point is buying the long-term trend rather than the unsustainable spike at the end of the last stage of the stock's rally.
In my 11:15 a.m. ET appearance on CNBC's "Morning Call" on Wednesday, I picked three stocks with charts that show this kind of buying opportunity.
Buying protection
Cleveland-Cliffs. I like Cleveland Cliffs best of all the iron ore miners because the company offers the best protection against a global economic slowdown that would reduce iron ore prices. The Cleveland-based company, which has long sold to overseas customers, has just begun to plan to expand production outside the United States and Canada.
Its offer to buy Australia's Portman Ltd., which produces 6 million tons of ore annually from its mines in western Australia, would up Cleveland-Cliffs presence in the Chinese market. In addition, with its mines running close to capacity, the company authorized the restart of idled mines in Minnesota. Those reopened mines will add 1.8 million tons of capacity annually.
In a vote of confidence in the future, the board reinstated the company's 10 cents-a-share dividend for the fourth quarter. Our StockScouter rated the stock a 9 out of a possible 10 on March 15.
Tackling the tough job
Valero Energy (VLO, news, msgs) is the second-largest oil refiner in the United States, but more importantly it specializes in the tough-to-refine sour crudes that are increasingly important as oil demand outstrips supply. With relatively few refineries in the United States able to handle the growing need to refine sour grades increasingly exported by Saudi Arabia and other OPEC members, refining margins have climbed at Valero along with volumes.
Its operating profit margin climbed to 6.4% in 2004 from a recent low of 3.4% in 2002, and it looks like margins will remain high for at least the first half of 2005. Analysts are calling for earnings to fall in the year's second half -- I think that overestimates the speed at which refinery supply will catch up with demand and projects a drop in oil demand in that I just don't see. Our StockScouter rated the stock a 9 on March 15.
Hitting its stride
Tidewater (TDW, news, msgs), the world's largest provider of supply and support vessels to the marine drilling industry, will start hitting its stride this year. In the September quarter, the company turned a profit from its Gulf of Mexico operations for the first time in more than two years. With demand picking up for deep-water drilling, I expect the utilization of the company's fleet of 500 ships and the day-rates it collects for them to climb this year.
Wall Street projects 92% earnings growth in the March quarter followed by 98% growth in the June quarter. For the fiscal year that ends in March 2006, Wall Street is projecting 61% growth in earnings per share. Our StockScouter rated the stock a 4 on March 15.
Exclusive picks
As always, I have two exclusive picks for CNBC.com on MSN readers.
RTI International Metals (RTI, news, msgs) isn't satisfied with doing business with one notoriously cyclical industry. This specialist in titanium operates in three: aerospace, oil and gas, and power generation. All three are either at the top of their cycle (oil and gas) or headed upward from a bottom (power generation and aerospace). That explains the near doubling of the order backlog that the company reported at the end of 2004 on the basis of new contracts with Airbus and BAE Systems (BAESY, news, msgs). The recent acquisition of Canada's Claro Precision also added contracts with Bombardier (BDRAF, news, msgs), which gives RTI International entry into the fast-growing market for regional jets.
The stock's recent sell-off, at least partly on news of insider selling, puts it back near its 50-day-moving average. Our StockScouter rated the stock a 5 on March 15.
Global Industries (GLBL, news, msgs) specializes in such services as pipeline construction, drilling platform installation and diving services to the offshore oil drilling sector, primarily in the Gulf of Mexico. The profitable fourth quarter made it two in a row for black ink, and the order book looks extremely promising for 2005. The order backlog rose to $262 million at the end of the fourth quarter, up from $96 million a year earlier. Bids outstanding hit $1.1 billion at the end of 2004. Wall Street projects earnings per share growth of 290% for 2005. That brings the stock's price-to-earnings ratio on projected earnings down to a more reasonable 23. Our StockScouter rated the stock a 7 on March 15.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.
|
