With the benefit of hindsight, it’s increasingly clear that a new commodity bull market began in 2020 following years of underperformance. From its low in March 2020, the Invesco DB Commodity Index Tracking Fund (DBC) is up 102%.
DBC is a broad-based commodity ETF that holds different industrial, agriculture, and energy commodities, each weighted differently. While the bull market has led to spectacular gains for many commodity stocks, there is significant variation within the asset class. Some commodity stocks are experiencing corrections of 20% or more even in the confines of an upwards trend.
Some of these stocks still have impressive growth outlooks in addition to attractive valuations. 3 of these stocks are ArcelorMittal (MT), Vale (VALE), and Nexa Resources (NEXA). In this article, I will dig into these stocks’ fundamentals, the reasons for the recent pullback, and why now could be a good buying opportunity.
MT is a steel manufacturer that owns and operates steel manufacturing and mining facilities in Europe, North and South America, Asia, and Africa. The company’s major steel products include semi-finished and finished flat products, electro-galvanized coils and sheets, piles, and seamless and welded pipes and tubes.
MT’s stock price is down about 20% from its high in July for similar reasons to weakness in NEXA and VALE. Basically, the Chinese economy is decelerating with threats to financial stability lingering like the Evergrande crisis and the property bubble deflating. At the same time, the government has curbed industrial activity to ensure that energy inventories are stocked for the winter and to reduce emissions.
Despite these challenges, MT’s business is doing well as its recent earnings report shows. In Q3, MT posted earnings per share of $4.27, beating expectations of $4.16 per share. Revenue was 52% higher to $20.2 billion but fell short of expectations of $22.2 billion. One factor in its sales miss was a drop in automotive demand which should improve in upcoming quarters.
The outlook for the steel industry and MT remains bullish despite a headwind from China’s slowing economy. Sources of steel demand like automobiles, infrastructure, and energy are all expected to grow on a YoY basis which will offset this negative. The POWR Ratings are also bullish on MT as it is rated an A which translates to a Strong Buy.
A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s 7.1% average gain. The POWR Ratings also assess stocks by 118 distinct factors, each with its own weighting. In terms of Growth and Value, MT stands out with A ratings. To see more of MT’s POWR Ratings, click here.
VALE is a Brazil-based producer and seller of iron ore and iron ore pellets for use as raw materials in steelmaking internationally. The company operates through Ferrous Minerals, Base Metals, and Coal segments.
While VALE produces many metals including copper, nickel, and molybdenum, iron ore makes up the bulk of its revenue. VALE’s price went from a low of $5.38 in March 2020 to a high of $21 in July 2021, basically tracking iron ore prices which went from $84/ton in March 2020 to $225/ton in July 2021. However, VALE’s shares are down nearly 50% since July, while iron ore is now back to $87/ton.
The major reason for the drop in iron ore prices is a slowdown in the Chinese economy which is leading to decreased construction and steel production. Inventories have also hit 6-month highs. However, VALE’s stock is attractive even at these lower prices for iron ore.
This is evident in the company’s Q3 earnings report which topped analysts’ estimates in terms of the bottom line. VALE reported EPS of $1.16 vs expectations of $1.08 per share. Revenue fell short of expectations at $12.7 billion vs expectations of $14.1 billion.
VALE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our POWR Ratings system. The stock also has an A grade for Quality and Value. To see more of VALE’s POWR Ratings, click here.
Nexa Resources (NEXA)
NEXA engages in the zinc mining and smelting business. It also produces deposits of several minerals, including zinc, silver, gold, copper, and others. The company owns and operates five underground polymetallic mines.
Last quarter, NEXA’s net revenue increased 103.8% year-over-year to $686.19 million in its fiscal second quarter. Its gross profit came in at $221.44 million, up 969.1% from the previous period. And its operating income was $170.51 million, versus an $11.61 million loss in the year-ago period. Its EPS was $0.82, compared to a $0.42 loss per share in the previous period. For the full year, NEXA’s revenue is expected to grow 30.4% year-over-year to $2.54 billion.
Another attractive aspect of NEXA is its free cash flow over the past 12 months of $1.97 per share which equates to about 25% of NEXA’s total market cap. This means there are good chances of management increasing share buybacks or its dividend.
NEXA’s strong fundamentals are reflected in its POWR ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system. B-rated stocks have posted an annual performance of 19.7%, outpacing the S&P 500’s annual 7.1% performance. In addition, it has an A grade for Momentum, and a B grade for Value and Quality.
Discover Today’s Best Growth Stocks
This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:
- Electric Vehicles
- Internet of Things
- Cloud Computing
- And Much More
If you would like to see more of his best growth stock ideas, then click the link below.
Want More Great Investing Ideas?
MT shares were unchanged in after-hours trading Thursday. Year-to-date, MT has gained 34.95%, versus a 26.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
More Resources for the Stocks in this Article
|Ticker||POWR Rating||Industry Rank||Rank in Industry|
|MT||Get Rating||Get Rating||Get Rating|
|VALE||Get Rating||Get Rating||Get Rating|
|NEXA||Get Rating||Get Rating||Get Rating|