"Weakness in commodities suggests a screaming sign of an overreaction; it's time to take another look at a high-quality, high-yielding commodity stocks such as Southern Copper (NYSE: PCU)," says global investing expert Nick Lanyi.
In his High Yield International, he says, "With mines in Mexico and Peru, Southern Copper ranks #1 in total copper reserves of any publicly traded company, making it almost a pure play on a rebound in the metal's price." Here's his contrarian outlook.
"Southern Copper has enough reserves to continue its current rate of production for the next 80 years without a single expansion or acquisition.
"With copper prices falling, the firm's earnings are taking a hit -- and the dividend has recently been cut. Now that this cut has already been factored into the shares, I think it's a better time to look at the stock than just a few weeks ago.
"Based on 2008 dividends, the stock yields 12.7% at the current price. Even if the dividend comes down more, I look for a yield of 8-9% over the next 12 months.
"And if copper rebounds over the next year, as I expect, the company's earnings will recover, and its dividend could be increased substantially late in 2009 or early 2010.
"Southern Copper has little debt compared to capitalization and more than US$1 billion in cash on its balance sheet. Its low-cost, efficient operations continue to generate solid free cash flow, even with copper prices at their current level.
"Copper prices have been cut in half since July. Longer term, the outlook for copper prices is excellent. Supplies are limited by equipment and labor shortages, which is affecting the ability of mines around the world to expand production.
"As emerging markets continue to grow and the world economy rebounds, copper demand will rise because the metal is used in power plants, electrical wiring, plumbing and other essential building blocks of a modern economic infrastructure.
"The stock currently trades at a P/E ratio of only seven, well below its historical average in the 10-12 range. A rebound to historical averages would imply a gain of roughly +40-50% from current levels.
"This is definitely a contrarian play. Copper demand certainly will suffer during a worldwide recession, and Southern Copper's earnings along with it.
"However, given the severity of the sell-off and the size of the yield, I think now is the time to act. The stock could remain volatile, but within a year or so, the reward could be substantial."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
12-10-2008 @ 4:54PM
Ray said...
I will hold my copper#1 recycle stock in the backyard til it s at $2.50 a pound again. It s $.75 today.