According to a Form 4 filed with the SEC, two limited partnerships connected to Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) Board member James Flores together purchased over 500,000 shares of stock in late July at prices of about $28.65 per share. Studies show that stocks bought by insiders tend to narrowly outperform the market on average (read our analysis of studies on insider trading) and this makes some amount of sense since unless they are confident in the $28 billion market cap basic materials company’s prospects insiders should prefer to diversify their wealth. Investors can’t imitate every insider purchase, and shouldn’t do so blindly, but these stocks can serve as initial ideas for further research.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has fallen over 25% since the beginning of December 2012 on a number of factors. First, the company announced that acquisition of two oil and gas companies; markets believed that management might be overpaying for these acquisitions, in addition to more common concerns regarding a lack of focus as production diversified. In the second quarter of 2013, Freeport-McMoRan’s product sales slipped slightly versus a year earlier and with production costs increasing the business experienced a more than 50% decrease in operating income. To some degree this is a one time event as the company adds its oil and gas subsidiaries (which had been struggling prior to the transaction).
Earnings per share in Q2 were 49 cents; annualizing that figure yields a P/E multiple of 14 at current prices. It’s possible that Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) will better integrate its new acquisitions over time, leading to more efficient operations, but the dominant factor swaying its returns will be commodity prices. The gold market has been weak year to date, and copper prices are also down year to date on macro concerns including worries that Chinese growth is slowing dramatically. Income investors should note that Freeport-McMoRan currently pays a dividend yield of more than 4%.
In addition to insider trading activity, Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). This database also allows us to track interest in individual stocks over time. Billionaire John Paulson’s Paulson & Co. reported a position of 9 million shares in Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) at the end of March (see Paulson’s stock picks).
Southern Copper Corp (NYSE:SCCO) is the closest peer for the company. As might be expected it is more dependent on copper than Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is, and as prices have been weak it recorded a 15% decrease in revenue last quarter compared to the second quarter of 2012. This was attributed to lower copper prices as well as reduced production, somewhat offset by increased production of other metals. A number of costs increased and as a result Southern Copper’s earnings were down by about a third compared to the prior year period.
The stock trades at 14 times earnings, whether investors consider the company’s trailing results or analyst forecasts for 2014, and therefore is priced about even with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) going by that company’s most recent quarterly results. Integration risk would be lower here, though investors would have to consider whether that is more or less a concern than a purer focus on copper (which is sensitive to macro conditions). Despite low leverage Southern Copper Corp (NYSE:SCCO)’s beta is 1.8.
Another peer for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is Newmont Mining Corp (NYSE:NEM), a $15 billion market cap miner with a focus on gold. Newmont is down over 30% in the last year, as gold prices have fallen and markets have hammered gold miners as a result. Revenue has also been down here, going by recent reports, and in fact adjusted earnings were negative in the second quarter of the year. Wall Street analysts believe the company will recover next year, and so Newmont is valued at 14 times forward earnings estimates, though of course this would likely be dependent on gold prices rallying from current levels.
Any of these miners would be risky buys, and none of them is cheap enough based on recent results- using Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s Q2 rather than the full trailing twelve month numbers- to be a pure value stock. There are still three plausible long theses for the company- a lack of change in the dividend and therefore the maintenance of a high yield, improved margins from better integrating the oil and gas acquisitions, and the possibility of commodity prices recovering- though it’s understandable that investors might prefer to avoid buying the stock at this time on the basis of commodity risk.
Disclosure: I own no shares of any stocks mentioned in this article.