Given the current global economic environment, things could be much worse for Freeport-McMoRan (NYSE:FCX) and that’s saying something because, as of May 7, Freeport-McMoRan stock is lower by 31.63% year-to-date.
Arizona-based Freeport mines copper, gold, molybdenum, silver and other metals, as well as oil and gas. Obviously the last two are disappointing this year and, to an extent, that’s not a major stumbling block for Freeport investors because the company’s bread and butter is copper and gold mining.
Exposure to the yellow metal is providing a floor for Freeport-McMoRan stock as gold is one of this year’s best-performing commodities. While there are times when miners vex investors, zigging while gold zags, 2020 isn’t one of those occasions, as the Vaneck Vectors Gold Miners ETF (NYSEARCA:GDX) is higher by almost 20%.
The burden on Freeport is copper prices. So goes the red metal, so goes this stock in 2020.
Certainly a Cyclical Bet
Freeport is classified as a materials stock, putting it in a highly cyclical sector at a time when the market isn’t rewarding those or natural resources groups. Energy, industrials and materials are three of the worst-performing groups in the S&P 500 this year and the Materials Select Sector SPDR ETF (NYSEARCA:XLB) only looks good by comparison to its rivals from those other groups.
XLB is down 16%, while its energy and industrial counterparts are lower by 36.7% and 23.8%, respectively. However, Freeport stock is higher by 18.18% over the past month. What gives? To be sure, there is some encouraging data on the copper front. Perhaps surprisingly, Chile, the world’s largest producer of the industrial metal, said the novel coronavirus pandemic didn’t really affect output.
Second and arguably more importantly, China, the world’s biggest consumer of the red metal, is starting to get its economy back to normal and that is positive for the commodity.
What’s interesting about the recent copper rally is that prior to the last couple of days, there wasn’t much supportive news out of China. Rather, the fuel for the upside probably came from a source with finite capabilities: short covering in the futures market, which data confirm took place.
“There has been a paring of speculative short positions on both the CME and the LME, but any sign of buy-in to the recovery narrative is conspicuous by its absence,” according to Reuters. “That may reflect fears of a COVID-19 relapse in the form of a second-wave hit to manufacturing demand, but there is also a suspicion that one particular type of investor is leaving the copper market.”
This is relevant for investors mulling Freeport-McMoRan stock because if professional commercial speculators aren’t stepping into the copper market on the long side, that implies they see limited appreciation potential in the metal.
The Bottom Line on Freeport-McMoRan Stock
Last month, Freeport said it’s cutting 2020 spending by $1.3 billion, joining an array of natural resources companies in slashing capital expenditures, but that news is priced into the stock.
So are the other tailwinds of low energy and high gold prices. With all of that in mind, the case for Freeport stock circles back to China. With this name, investors are making a bet on the world’s second-largest economy rebounding.
Trading at just 0.93x sales, Freeport-McMoRan stock is a cheap way to make that bet, but the wager has to be made in advance of China releasing positive economic data and that’s a risk unto itself.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.