Material Market

Are we seeing a materials breakdown?

Copper prices have been falling for weeks. Stocks tied to materials prices, like mining and metals companies, have gotten clobbered. These company’s fortunes rise and fall with the commodities that they extract. As commodity prices rise, earnings from mining go up, and vice versa. Is it time to jump in?

For patient investors, now may be a good time. It’s often profitable to buy when prices have fallen significantly, and a broad index of basic materials stocks has fallen over 25% in the past two months. Some well-managed mining stocks are currently trading at only five times their current earnings levels.

But in the near term there may be some further choppiness. These companies are tied to growth in Asia, and Asian currencies have been falling. The current message is of diminishing activity and lower inventories. Additionally, a survey of Chinese purchasing managers indicates that their factory production is easing. This is important, since their heavy industries have been building inventories for over a year, so they aren’t positioned for a slowdown in demand.

The story is clear: since we don’t know what the future holds, buying high-quality stocks that are currently trading at depressed levels is often a good strategy. But you need to be careful. Long-term investing usually rewards patient, price-oriented research, but those stocks are cheap for a reason. Short-term price swings can give anyone agita. A bargain isn’t a bargain if it kills you.

Douglas R. Tengdin, CFA
Chief Investment Officer
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