Four oversold big miners that should rally

Goldman Sachs said current copper prices offer an attractive opportunity to establish long positions in the metal. Copper is currently near its low of the year. This likely means that big, oversold, diversified miners with low PEs stand to benefit from this situation.

There are still a lot of headwinds. The US economic data has looked weak recently. The EU credit crisis seems to be worsening daily. Japan is officially back in a recession. I am not sure I would want to buy the small miners whose prices could fall through the floor on a spate of bad news.

However, the oversold condition of the big diversified miners presents an opportunity. The one caveat may be that you may wish to take GS’ copper advice, “buy on dips and sell on a strong rally.” You can probably make more money that way, especially over what promises to be a choppy summer. The good news for those who like to spend less time on the market is that the big miners are not only oversold at the moment, they are trading a low multiples. They are “good long term buys.”

The table below contains some of the fundamental data about big miners BHP Billiton Limited (BHP), Freeport-McMoRan Copper & Gold (FCX), Vale S.A. (VALE), and Rio Tinto Plc (RIO). These companies all mine metals and coal. The data are from Yahoo Finance and TDameritrade.

From this data they all look like good companies; each seems to have its own good points. For the purposes of this article, I am presuming some people may wish to take GS’ advice about selling into a good rally and buying on a good dip. With this in mind, I point out that the full year EPS estimates for both VALE and RIO show slight declines in earnings from FY2011 to FY2012. RIO still has a great five-year EPS Growth Estimate per annum as well as other good numbers.

However, these longer term good numbers may not help shorter term traders. In my mind, the above four stocks are all good longer term investments. Shorter term, BHP and FCX look like the best investments. BHP shows a better five-year EPS Growth Estimate per annum, and FCX trades at lower multiples. You should be able to win with either or both.

For technical trading, the charts below will help.

One-year BHP chart:

The BHP chart is still heading slightly upward. It looks like every move substantially below the 50-day SMA has been a good buying opportunity. The Slow Stochastic indicates that BHP is currently oversold. It should be a good time to buy.

One-year FCX chart:

The FCX chart cannot be seen as heading upward. However, it can be seen as consolidating. It appears that buying when this stock is substantially below the 50-day SMA will yield a good return. The Slow Stochastic indicates that it is currently oversold. This should be a good buy point.

The FCX chart cannot be seen as heading upward. However, it can be seen as consolidating. It appears that buying when this stock is substantially below the 50-day SMA will yield a good return. The Slow Stochastic indicates that it is currently oversold. This should be a good buy point.

One-year VALE chart:

The VALE chart has turned downward. A market technician would not want to buy this stock until it turns more demonstrably upward. The Slow Stochastic does not show the stock as oversold. You would not want to buy this stock on a short term basis. I would probably hold off buying it even on a long term basis.

One-year RIO chart:

The RIO chart looks like it is in a consolidation phase. RIO is currently below its 50-day SMA. The Slow Stochastic shows it as oversold. You could probably make money by buying and selling RIO as per GS’ directions for copper. The 200-day SMA may provide some good support.

I would tend to stick to BHP and FCX if I were trading short term per GS’ copper trading advice (buying on dips and selling on rallies). If I were buying long term, I would tend to stick to the stocks with the higher five-year EPS Growth Estimate per annum (BHP, FCX, and RIO). VALE appears to be a fundamentally sound stock. I have to believe it will benefit significantly from the Rio de Janeiro Summer Olympics in 2016, but that’s still a ways off. Also, all of the others have major resources more proximate to China and India. If that’s where you want to sell, it helps to be close.

As a reminder, any significant EU credit crisis development could push all commodities down. The same could be said for a major US or Chinese negative economic event or trend. The latest US weakening should be monitored closely to ensure that it does not develop into a major trend, if you are trading short term.

Longer term, you can probably rely on these stocks to recover from any losses. Emerging market growth is no longer a small event. China is the number two economy in the world. How can anyone really call that “emerging”? There will be long term increases in the demand that will drive prices up long term. For instance, China is supposed to grow its electricity use by 9%+ in 2011. Use has grown by low double digits so far this year. A lot of that electricity is generated by coal-driven power plants. This will mean increasing profits for these miners.

If you have big doubts about the market, don’t do this trade. If you just need a little reassurance, look at the Durable Goods Orders results Wed. morning. If they meet or beat estimates (and the overall market futures look okay), enter the trade. If Durable Goods Orders miss, it may mean the overall market is still going down (Ed: Orders fell by 3.6%). Then keep this trade in the back of your mind. You may be able to enter at an even more favorable price.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BHP, FCX over the next 72 hours.