(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
If inflation is back, and metal prices start to rise, then there is likely no more significant beneficiary of those rising prices than the companies that get the metals out of the ground, the miners. Freeport-McMoran Inc.(FCX), BHP Billiton Ltd. (BHP) and Rio Tinto Plc. (RIO) are three such companies which have risen sharply over the past few months. But should metal prices continue to rise on higher inflation expectations, their shares could continue to rise perhaps as much as 20%. (For more, see also: Top 4 Gold Stocks as of 2018.)
JP Morgan recently noted that rising inflation is beneficial for commodities such as base and precious metals when inflation is growing at 2% or higher. Since January of 2017 copper prices have increased from roughly $2.50 to $3.20, a rise of nearly 28%, while gold has risen by 15% from approximately $1,150 to $1,330. The rise in metal prices and climb in demand has caused Apple Inc. (AAPL) to suddenly engage in talks to buy cobalt, an important metal for phone batteries, directly from miners.
BHP Billiton is on the verge of breaking out, sitting right below a key resistance level around $46.80. Should the mining giant see its stock rise above resistance at $49.15, it could see a meaningful advance of roughly 20%, to $56. Resistance at $49 has been challenging to rise above, as the previous attempt lead to a decline back to $44.
Rio Tinto shares are also getting close to a breakout, as shares continue to approach resistance at $60. The iron-ore miner has broken out of a multi-year downtrend, which is helping to alleviate the downward pressure on the stock. A rise above $60 could help the shares climb by 20%, all the way back to $72—prices not seen since 2011. (For more, see also: 6 of the Biggest Chinese Mining Companies.)
Freeport McMoran is sitting like the others, just below resistance at $19.75. Should the copper miner's stock be able to rise above resistance at $19.75, the price could increase all the way to $24, where the next level of resistance waits.
Each of these three stocks could be big winners if inflation takes hold of the U.S. and global economies driving prices of metals higher. But if it turns out the inflation fears are false, the recent run up these stocks, along with the metal prices, are likely to see sharp declines.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.