Home Commodities Chevron and Freeport McMoRan Stock Have More Upside

Chevron and Freeport McMoRan Stock Have More Upside

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Cyclical stocks have put together an impressive rally, and it isn’t too late to get in.

Cyclical companies are those whose sales and profits are tied to the condition of the economy. The group includes restaurants, hotels, auto makers, and home-goods sellers, which see faster growth when consumers have more discretionary income to spend, or there are more people earning incomes. The same goes for financials, which lend more when there’s increased demand for money in a robust economy, and see higher asset values when markets are rising. 

Cyclicals also include materials and commodities companies that provide the raw materials to make goods including houses and cars that are in demand in a stronger economy.

Those materials and commodity names have gained of late. The


SPDR S&P Metals & Mining

exchange-traded fund, which includes copper miner

Freeport McMoRan

and aluminum manufacturer

Alcoa
,

has gained 12% since hitting a low point just before midway through February. The


Materials Select Sector SPDR

ETF, which includes chemicals maker

Air Products & Chemicals

and steel maker

Nucor
,

is up 12% in the same stretch. The


Energy Select Sector SPDR

ETF, which includes large oil producers such as

Chevron

and

Exxon Mobil
,

is up 16% in that time. They’ve all beaten the


S&P 500’s

5% gain. 

Driving the gains, at large, has been better-than-expected economic data, such as manufacturing and a U.S. economy that keeps growing. Also helping is the fact that the Federal Reserve is more likely to cut interest rates than raise them this year. While the economy has shown strength, the rate of overall inflation has been declining.

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The best news of all is that the gains in these stocks could probably keep coming for the next few months.

For oil and metals mining companies, the prices of commodities have risen, which bodes well for their earnings.

WTI crude oil

and

copper

are both up by double-digit percentages since mid February. Despite those rises, analysts haven’t lifted revenue and earnings estimates for the relevant companies yet according to FactSet, but they likely will if commodity prices remain elevated.

To be sure, metal-mining stocks have already become more expensive, trading at the high end of their ranges in the last three years, with the mining ETF trading at 16.3 times expected earnings for the coming 12 months. But any increase to profit forecasts would make the shares look less expensive.

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Materials makers can keep growing earnings. Air Products and peer chemicals maker Linde raise prices regularly, and are expected to do so over the next few years. That’s one reason why analysts expect the materials ETF to see just over 2% annual sales growth over the next three years. Without too much cost inflation, profit margins can increase, and earnings per share can grow almost 8% annually in the same period. 

For stocks in all of these sectors, these positive earnings trends can still lure in more buyers. The three cyclical ETFs are trading at 8% to 12% above their respective 200-day moving averages. While that may seem a bit high, consider that in the past 10 years they have all traded at more than 20% above the averages, according to FactSet. The stocks in the ETFs don’t even have to reach as high as those levels to see more gains. 

“We remain bullish on risk-on factors (Value, Deep Cyclicals),” writes 22V Research’s Dennis DeBusschere, who cites what may be an extended cycle of economic growth. 

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For those who already own these stocks, holding on for more gains may prove fruitful. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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