Some commodity investors I talk to say copper is the most-volatile of the metals they’ve traded. Many refuse to consider going near it anymore.
Personally, I think they’re just cranky about losing money recently on what should have been a sure bet.
Copper is more of an industrial metal than a precious metal. However, similar to its gold and silver brethren, it should pay over the longer term to keep the faith that an investment should pay off over the longer term.
After a brief sell-off, the less-than-precious metal copper just might start to shine again in the second half of the year.
Today I want to share with you the three stocks I believe can become big beneficiaries, plus an easy way to pick the one that’s best for your own personal investing style.
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A Metals Bust …
For the past several weeks, the broader metals markets have been driven down by a series of negative macro-economic events.
Concerns about Europe’s debt crisis, the so-called fiscal cliff in the U.S. and the slowdown in Chinese metals-buying are causing some traders to question the claims of the voracious appetite for resources.
Chasing that dream, over the last five years, big miners have put forth big money to build capacity for the longer-term demand in China, India and elsewhere for iron ore, copper, molybdenum and other basic materials.
A lot of these projects depend on government support and regulations. So the government transition in China and elections in the United State have also been blamed for part of the slowdown.
… Before a Potential Boom
For example, in China, after several monetary-easing measures taken in the second half of 2012, Chinese copper demand is now forecast to be approximately 8.5% for 2013.
That’s much better than the 5% growth for 2012. And it’s especially supportive for the world copper demand boom story.
China represented 41% of the world demand last year, so estimated copper demand of 5% in 2013 is not unlikely.
More locally, the United States now only represents 8% of the world demand for newly refined copper. So it does not have that direct impact on demand.
However, it’s the most-important consumer of scrap copper. This in turn affects the copper demand/supply in other economies. So while the recovery story in the U.S. helps, it’s not a big swing factor on copper.
Where the Biggest Copper Demand Could Come From
A more important market for copper is Europe, where approximately 19% of the world demand for refined copper comes from.
Penny for your thoughts: That copper coin in your pocket might not seem like it’s worth much, but as a longer-term investment, those cents could really add up!
According to Southern Copper (SCCO), one of the largest integrated copper producers in the world, there are signs that copper demand has stabilized and could increase of 2% for this year for 2013.
That doesn’t seem like a big deal. But the drop in consumption last year there was huge.
But estimates are not enough to keep investors’ eyes on the prize.
Just this week, the impact of lower copper prices was prominent in Mexico’s stock market. Grupo Mexico (GMBXF on the Pink Sheets) is Mexico’s biggest mining company by market value and a sub-$4 stock.
Shares recently declined to their lowest level in almost seven months on speculation that European debt turmoil will curb growth and erode demand for copper.
Right now my favorite holding in this area is Southern Copper, which has the largest copper reserves in the industry. The company operates in Mexico and Peru and explores in Argentina, Chile and Ecuador, too.
I say “holding” because it’s not cheap enough to add to yet, and I’m watching it for a better entry point. SCCO is currently at the high end of its trading rage at about $36 per share.
If you prefer stocks with larger volume trading and even more volatility, another potentially interesting play on this Freeport-McMoRan Copper & Gold (FCX).
Again this is not for everyone. The stock has a high beta of 1.86 versus the S&P 500. By comparison, Southern Copper’s beta is 1.53, while Grupo Mexico’s is 1.59.
How to Trade Using Beta
Beta is a measure of individual stock risk relative to the overall volatility of the stock market.
In other words, just because the broader market is (or isn’t, as the case may be) feeling the effects of heightened investor fear or concern, doesn’t mean individual stocks are receiving the same treatment.
Although the markets wavered this week on the drama coming out of Cyprus, volatility (a measure of investor sentiment) has remained low. That’s what happens when traders and investors are relatively complacent.
In times like that, then, you may want to gravitate toward more-volatile stocks. And the way to identify them is to find their Beta, which you can find on most trading platforms or on free financial sites like Yahoo! or Google.
When Beta is positive, the stock price tends to move in the same direction as the market. The magnitude of Beta tells by how much.
If a stock’s Beta is greater than 1, it means that when the market index goes up 1%, we can expect the stock will go up by more than 1%.
On the contrary, if the market goes down by 1%, we expect the stock to go down by more than 1%.
Negative Betas, while rare, signify a negative correlation. When the market goes up, we would then expect the stock price to go down.
My take on these is that these copper stocks may be signaling an upcoming market downturn. And given the fundamentals for their industry, they should be among the first stocks you would buy AFTER a general market correction.
Until next time,
P.S. A global investment that never goes out of style is gold. Yet, a major precious-metals news outlet BANNED Uncommon Wisdom’s latest video from its site because it was too controversial. Here’s what their viewers missed … that YOU can use to your advantage!