Base materials, as an investment story, have been a heavy load
to bear in the past 2 years since the China recovery story has
never really taken hold. And this has been nowhere more evident
than in the stocks of big diggers like
Slipping back down to a Zacks #4 Rank (Sell) in late March, BHP has
fallen from $70 to new four-year lows this week below $58. In fact,
since its post-recession peak above $100 in 2011, the stock has
consistently held a Zacks Rank of #3 (Hold) #4 (Sell) or #5 (Strong
Sell) because of its stagnant or declining earnings estimates.
Here's a look at the shares of this $94 billion mining behemoth,
known for its vast reserves of iron ore, coal, copper and other
natural resource assets, vs the SelectSector SPDR Materials ETF
(XLB) for the past 4 years...
I mentioned some of the big and common mining products of BHP, but
you may be surprise they also have access to silver and diamond
mines. What surprised me is that when the company made a big
decision last year to diversify into the energy business, it hasn't
helped their earnings outlook much at all.
I assumed that the company going into oil and gas exploration and
production with their $12 billion take-over of PetroHawk Energy in
the summer of 2011 would give them exposure to one of the few
rising commodity prices, and also lower the input costs of their
inherently high energy use.
But that actually became a peak for the shares as they formed the
right shoulder of a head & shoulders top below $100. Once they
fell through the neckline at $86, they have never been higher. The
decline in earnings estimates also tell the story...
Deflation and Commodities
Global investment markets are currently experiencing a lot of big
asset shifts in the wake of the Federal Reserve's indication that
they may begin to taper QE bond-buying.
And China's overheating economy is causing interest rates to rise
naturally there as well, while non-financial businesses find
themselves in a cash crunch and real estate speculation runs
But the overall theme for commodities since 2011 has been
dis-inflation. And as long as the world's most important central
banks are stepping back from further monetary stimulus, and China's
appetite for raw materials slows down, the earnings trajectory for
metals and mining companies may still be downward.
Best to wait for the turn-around in the outlook and estimates
before digging too deep in the shares of BHP or other big miners,
which currently rank in the bottom 10% of Zacks 265 industries.
Kevin Cook is a Senior Stock Strategist with
BHP BILLITN LTD (BHP): Free Stock Analysis
CLIFFS NATURAL (CLF): Free Stock Analysis
RIO TINTO-ADR (RIO): Free Stock Analysis Report
SPDR-MATLS SELS (XLB): ETF Research Reports
SPDR-SP MET&MIN (XME): ETF Research Reports
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