Metals and Coal the Sectors to Watch

by David Russell | March 28, 2011 12:41 pm

Metals and Coal the Sectors to Watch

Investors are shifting to new sectors: metals and coal. Stocks such as Freeport-McMoRan (NYSE: FCX[1]) and Alcoa (NYSE: AA[2]) have been weak most of the year, but now they’ve broken their downtrends. Last Tuesday was a big news day for the industry, with insiders on opposite sides of the globe describing a positive backdrop: Tom Albanese, CEO of Rio Tinto (NYSE: RIO[3]), said in Hong Kong that aluminum prices are poised to climb. Later in the day in New York, the head of FCX said copper demand was picking up. And the boss of Goldcorp (NYSE: GG[4]) described unexpectedly strong demand for gold among Chinese consumers.

Investors should also be aware of silver producers such as Coeur d’Alene Mines (NYSE: CDE[5]) and Exeter Silver because, whatever gold does, silver does more. Both precious metals look extremely bullish now, and this China angle adds an entirely new dimension to one of the strongest trends of the last decade.

Coal companies like Consol Energy (NYSE: CNX[6]) and Peabody Energy (NYSE: BTU[7]) are also hitting on all cylinders, and show strength on just about every front. First, they’re linked to metals because coke is used in steel production. Secondly, they’re riding the surge in energy prices as the world frets about unrest in the Middle East. And third, the nuclear mess in Japan is restoring interest in good ol’ fossil fuels as a reliable and safe source of energy.

Investors also cannot ignore rare earth stocks, a subsector of this industry that has only emerged in the last year. The main names are Rare Elements (AMEX: REE[8]) and Molycorp (NYSE: MCP[9]), which made a huge move in late 2010, consolidated and are returning to our Heat Seeker tracking system. They’re not only new as public companies, but also new in terms of importance because their metals, unusual substances such as Samarium and Praseodymium, are needed for electronics and high-tech equipment like lasers, specialized magnets and batteries.

China was previously willing to supply the world, but now they’re turning mercantilist and limiting exports. Given that the novelty of this group, you can bet that many big institutional investors remain completely underinvested. That means REE and MCP have the potential to double and triple several times over in the next few years.

Two other names that deserve some attention are Century Aluminum (NASDAQ: CENX[10]) and James River Coal (NASDAQ: JRCC[11]). CENX reported very strong earnings on Feb. 15 and is now challenging its 2010 highs. JRCC gapped higher earlier this month after a strong report of its own and has also increased exposure to metallurgical coal. But the thing I really like is that they’re still far below the 2008 highs. These stocks seem to be highly leveraged, and I suspect will significantly outperform peers if their broader sectors rally.

Disclosure: I own CENX shares.

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 Metals and Coal the Sectors to Watch[12]

Endnotes:
  1. FCX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCX
  2. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  3. RIO: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIO
  4. GG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GG
  5. CDE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CDE
  6. CNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CNX
  7. BTU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BTU
  8. REE: http://studio-5.financialcontent.com/investplace/quote?Symbol=REE
  9. MCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCP
  10. CENX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CENX
  11. JRCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JRCC
  12. [Image]: http://ad.doubleclick.net/jump/N5627.271272.INVESTORPLACEMEDIA/B5295285;sz=1x1;ord=1416957475?

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