Tuesday, August 25, 2009

Highest P/Es for Commodity Companies Hide Bargains

From Bloomberg:
Commodity companies, the most- expensive stocks in the Standard & Poor’s 500 Index, are turning into relative bargains.

While investors paid an average 33.1 times earnings this year for copper, plastic and seed producers last week, the premium fell to 17.7 based on 2010 analyst estimates that call for profits to almost double, data compiled by Bloomberg show. The decline in the price-earnings ratio is the steepest for any group in the S&P 500 and would leave the companies 23 percent less expensive than their historical average of 23.2 times.

To some of the world’s biggest hedge funds, that opportunity is too good to pass up, especially as brokerages boost forecasts following second-quarter profits that were 60 percent higher than estimates, the most of any industry. At a time when bears say China’s moves to rein in speculative investments may curb demand, Harbinger Capital Partners, D.E. Shaw & Co. and Marshall Wace LLP all bought commodity producers last quarter amid signs the global economy is emerging from its first recession since World War II.

“You tend to want to buy these stocks when the multiples are high and about to move lower,” said Leo Grohowski, who oversees $142 billion as the New York-based chief investment officer at BNY Mellon Wealth Management. “You’ve got these huge earnings swings coming up, and a lot of investors, like us, are looking ahead for a better 2010.”

115% Profit Surge

The firm has been buying more commodities and commodity stocks, including Phoenix-based Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, Grohowski said. Freeport will earn “between $5 and $6 a share next year,” or an increase of as much as 115 percent, he said.

Companies in the raw-materials industry gained 67 percent from the S&P 500’s 12-year low of 676.53 on March 9 through last week, led by Memphis, Tennessee-based International Paper Co.’s 381 percent gain and Perrysburg, Ohio-based Owens-Illinois Inc.’s 259 percent increase. Only banks and brokerages have rallied more, rising 134 percent on average. The S&P 500 advanced 52 percent in that period....MORE