Shares of Freeport McMoRan (NYSE:FCX) have finally found some footing after a sharp sell-off. FCX stock has fallen over 13% from a recent high at $38 in mid-February. While the previous rally may have gotten too red-hot, the recent sell-off is looking overdone in a similar fashion. Look for the $30 area to continue to hold support over the foreseeable future and FCX to head higher.
Freeport McMoRan is one of the world’s biggest copper producers. The company produced over 3.2 billion recoverable pounds in 2020. Copper prices should be a major beneficiary of the $3 trillion dollar infrastructure bill that should pass Congress in the coming weeks. This should bode well for profits down the road. The lows are likely in for FCX stock.
Higher recent copper prices are already being reflected in the earnings. FCX should report its next quarterly earnings in late April, with expectations for 53 cents in EPS. This puts the for forward multiple at a very attractive 15x.
If copper prices head even higher based on the infrastructure bill, the increase in earnings should translate to both a higher multiple and higher stock price.
Technical Take on FCX Stock
Freeport McMoRan is showing signs of improvement from a technical perspective. The 9-day RSI had reached the lowest levels of the past year but has turned higher. MACD also bounced off of recent lows. Momentum has begun form a base as well. FCX stock got to the biggest discount to the 20-day moving average in the past 12 moths before rallying sharply.
The last time all these indicators aligned in a similar fashion marked a significant low in FCX stock. There is major horizontal support at the $30 area.
The technicals all point to a major low being formed in FCX stock. I expect a move back to the 20-day moving average of $34.59 as my initial price target.
FCX stock is normally highly correlated to the price of copper. This makes sense given the company is such a huge copper producer.
Recently, however, that correlation has broken down. FCX stock has underperformed copper by a wide margin over the past few weeks. I expect a reversion back to the mean, with FCX outperfoming copper in the near term to close that gap. A further rally in copper would serve to take FCX stock to even higher levels as FreeportMcMoRan plays catch up with copper.
Last Thursday saw some aggressive, unusual call buying in FCX options. Over 12,000 of the April $31 calls traded versus only 3,360 open interest. Over 6,000 of the April $34 calls traded as well. Friday saw some additional buying with another 1,700 contracts of the April $34 calls trading. Many times this type of big volume is a harbinger that a large hedge fund or institution is looking to lever up to profit from a move higher in FCX stock.
Option implied volatility (IV) remains fairly subdued even given the recent weakness in FCX stock, trading at only the 27th percentile. This means option prices are still relatively cheap, which favors long option strategies when constructing trades. A defined risk call calendar spread trade makes probabilistic sense to position for a pop in FCX stock.
Buy the FCX May $34 calls and sell the FCX April $34 calls for a $1.10 net debit.
Maximum risk on the trade is $110 per spread. Ideally FCX stock closes near the $34 area on April expiration (April 16). The trade structure allows additional selling of weekly options to further reduce the risk if the original April options expire worthless.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.