The Material World
The S&P 500 is not even two weeks from reaching an all-time high, but there’s turmoil underneath the surface of the market. In particular the relative strength and momentum indicators show that some sectors like tech and consumer discretionary are suffering and will need some time before leading the market again. But in a normal market, which we’re in, when some sectors are down, others are up. In particular, materials is the strongest of the traditional 12 S&P sectors. Materials show signs of rising price momentum and relative strength, meaning, for now, the best bets are being placed there. As we build our portfolio in Greentech, this issue we turn toward two large cap companies that produce materials the world needs both to support the economy and to expand into renewable energy.
The heart of Greentech – solar, wind, EVs and other growth businesses driven by technological advances – remain in a retracement with their broader tech brethren. Interestingly, a report by Credit Suisse floated the notion that partly affecting prices at the moment is that as investor interest surges, portfolio managers who used to focus solely on fossil fuel companies have been shifted to manage renewables – and are applying their commodity and cash-flow-focused models inappropriately to Greentech stocks, which are better viewed as, well, tech stocks. Probably a bigger issue right now: the lack of advancement on an infrastructure bill.
“We are approaching a decisive moment for international efforts to tackle the climate crisis – a great challenge of our times.”
-Fatih Birol, International Energy Executive Director, writing in the May report Net Zero by 2050
Featured Stock: Freeport-McMoRan, Inc. (FCX)
Copper is an important component of renewable energy systems for the same reason it’s used inside our houses – it’s an excellent conductor of electricity, it bends easily without breaking and, without it, electrical systems would use about 20% more materials. Renewables demand a good deal of copper: every megawatt (MW) of solar uses about 5.5 tons of copper, a MW of wind uses almost 4 tons, 1 MW of energy storage will use about one ton and about every 11 electric vehicles (EVs) will use a ton of copper too. And specific demands can be much higher – offshore wind turbines need nearly three times as much copper on average, according to data from Navigant Research and New Energy Finance. The boom in renewable installations is creating a notable uptick of demand: 181 gigawatts of wind are projected to be installed globally in 2021. That requires the equivalent of 2.9% of global copper refinery production, according to data from the U.S. Geological Survey– the agency that tracks commodity production and demand.
Copper demand reflects the overall economic health as well. The fact that the metal is also priced in dollars globally – including the Chicago and London futures markets – brings the wrinkle that a weaker dollar will encourage higher commodity prices (the historic lows of most commodities in 2000 came in part because the greenback was remarkably strong). If the reopening economic boom comes to pass as predicted, demand and a presumed weaker dollar will help copper prices along.
All that brings us to our Greentech selection of Freeport-McMoRan (FCX). The Phoenix-based company is the third-largest producer of copper in the world, behind Australia’s BHP at number two and the Chilean government-owned Codelco. Freeport owns Arizona’s Bagdad mine, one of the world’s largest deposits of copper. Mining’s been going on there since 1882 and probably will extend into the 2100s. Freeport sold 3.2 million pounds of copper in 2020, which should rise to 3.85 million this year on pandemic-related reopenings and a new mine – Lone Star – that just started operations near the Bagdad mine. In 2022 and after, management says the company will be producing 4.4 million pounds of copper annually. Freeport considers itself a copper producer solely, unlike other companies that seek to mine more broadly or produce another metal as their primary focus.
In addition to Lone Star, Freeport is ramping up an underground mine in Indonesia, Grasberg, to full production by next year. It owns 49% of the mine and operates it (paying the vast majority of the costs). The completion of the underground Grasberg complex will double production from pre-pandemic years. That mine also produces gold, which is situated with the copper, and its expansion will double gold sales by 2023, to 1.8 million ounces. (Freeport also has a Peruvian mine that produces gold and the company also produces about 4% of the global supply of molybdenum, a metal used primarily as a corrosion-resistant add-in with steel.)
About 37% of Freeport’s $16 billion annual sales come from North America, with South America and Indonesia evenly splitting the rest of non-gold sales, though Indonesia, as mentioned above, generates significant gold sales as well. FCX also has a small Spain-based company that recycles metals from electronics.
Management is exceedingly bullish about the copper market. One is because copper is the commodity most correlated historically with GDP growth. China has been a large driver of the copper market due to its fast rate of growth the past 20 years. That country, combined with the western world recovering from COVID-19, means demand should be brisk.
The other reason is that demand is expect to be further enhanced by the need for renewable energy projects, EVs and charging networks for copper. “Unless there’s some global calamity, prices, it seems to me, clearly have to rise substantially,” Freeport CEO and chairman Richard Adkerson told analysts in the late-April earnings call when copper was around $4.30 a pound. Such open bullishness is unusual from commodity CEOs, but it reflects the knowledge that new production cannot come on-line quickly. Freeport has mines in various stages of permitting, but a development halt due to the pandemic means management is reevaluating every capital expenditure again before resuming previous projects or committing to new ones.
One word of caution, however: with commodities many commentators will project out forecasts in demand and supply that suggest fantastical price gains in a few years – think Peak Oil of the mid 2000s or, the very metal we’re discussing, copper – in the 2000s, WWI and the mid-1800s. There may be an exception we’re missing, but ultimately every commodity can be swapped out for another if prices get too out of whack, and that’s the same for copper – aluminum works well enough in some situations, steel in others, fiber optics in some applications. Or, more production will eventually come online: old mines will reopen, recycling rates will increase. Or perhaps demand will drop when costs get high enough to make surrendering energy efficiencies from using copper a legitimate option.
Helping Freeport’s results is the fact it effectively pays no federal taxes in the U.S. due to tax loss carryovers offsetting current corporate taxes. In the near term, that and the previously mentioned temporary lack of meaningful new capital investment means every increase in metal prices goes right to the bottom line. This year, earnings per share are projected by Wall Street to be $2.64, rising to $3.19 next year. That figure was 55 cents last year and two cents in a difficult, low-commodity price 2019.
That said, Freeport isn’t a value play – the market has noticed the compelling economics of copper supply and demand and bid up shares five-fold in the past year to 42, giving it a trailing price-to-earnings of 34, only slightly below the S&P 500’s ratio of 37. Management prefers investors focus on price-to-Ebitda, which strips out accounting provisions like depreciation and amortization. At weaker commodity prices than today, FCX trades at about 3.5 times forward Ebitda. That assumes copper at $4 a pound, gold at $1,750 an ounce and molybdenum at $11 a pound – current prices are $4.80, $1,840 and $13 respectively.
Chart-wise, two measures of where shares can go from here point to a run to 60. FCX recently pushed through long-term resistance at 35-39, which means the next test should come around 48, its all-time high. Since December FCX has been stepping up – with periods of base building followed by a couple of weeks of gains. Last week was a down week, but on huge volume that keep the trading range in the top half of the prior week’s gains which is a decently bullish sign for those who use candlestick charts for near-term bias, as we do.
Because Freeport is so commodity dependent, it’s worth looking at the long-term chart of copper as well. In commodities, more than any other group of securities, traders keep the all-time high prices in mind as a natural place to sell and take profits. That’s in some contrast to equities, where our analysis tends to discount heavily the trading effect of resistance levels and all-time highs that sit back more than 10 years – the reasoning being resistance in equities is pent up selling demand from shareholders, rather than as a value judgment or topping signal as in commodities. The good news for us: copper recently busted through the 2001 peak price, which was the highest level for copper since WWI. That the metal hit a new 100-year high with little pushback from commodities traders bodes well for further gains.
What to Do Now
Buy here. Shares look inclined to step back a little lower if you prefer to wait and grab a better price, but a move down isn’t guaranteed. A dip under 40 toward 39 would be an excellent opportunity to buy. Support should start coming in in the high 38 region. Shares look to have multiple layers of support below that, so set the sell stop around 36.
Freeport-McMoRan Inc (FCX)
Revenue (most recently reported trailing twelve months): $15.48 billion
Earnings per share (TTM): $1.22
All-time high share price: 48.72
Market cap: $61.7 billion
Recommendation: Buy at 45 or below, with a sell stop at 36.
Steel Dynamics, Inc. (STLD)
Making steel is the most energy-intensive activity in manufacturing. Every ton of steel emits 1.85 tons of carbon dioxide, making steel production responsible for 8% of global greenhouse gas emissions annually. Most steel is produced using a blast furnace, almost always coal powered, to refine iron. A smaller amount, about 29% globally, is done using an electric arc furnace, in which an electrical current is used. Steel is so essential to modern society that it’s not going anywhere. The solution is to make the process environmentally acceptable. For blast furnaces, that can be done to some extent by carbon capture – a process that is largely experimental and quite costly – using a fuel source beside coal, like biomass, which is feasible some places with a lot of lumber resources but not everywhere – or making blast furnaces more efficient through various means available today. (Hydrogen instead of coal is a longer-term option being pursued in Europe). Electric arc furnaces are more easily made greener by powering them with renewable energy, through local Greentech or grid renewables. Since electric arc furnaces are better at utilizing scrap steel, increasing the level of recycling is a relatively simple improvement too.
The U.S. steel industry has been a leader in the shift to less carbon intensive steel-making. Domestically, more than three-quarters of steel is made in electric arc furnaces and, in the U.S., steel has a higher recycling rate than plastic, paper and aluminum. There’s a lot of work to do done to get steel in line with the need to eliminate carbon increases, but some producers are performing much better than others.
One is Steel Dynamics (STLD), an American steel maker that is one of the largest recyclers in the country through its use of scrap steel to feed its fleet of electric arc furnaces (it has no blast furnaces). Some 84% of the 11 million tons of steel it made in 2020 was from recycled metal. Its steelmaking produces just 12% of the emissions of American peers and uses just a quarter of the energy per ton of globally made steel. The company also recycles all of the water its mills used (water contamination being another problem with steel production). A negative, environmentally, is that Steel Dynamics’ furnaces are in Indiana, Mississippi and Texas, three states with poor renewable energy generation.
Steel Dynamics primarily makes flat roll steel plus rails, shapes and structural steel among others. Two-thirds of its sales are in so-called value-added steel, like coated steel which ends up in water heaters, grain silos, cars, refrigerators and a host of other places. Industry-wide, American steel makers are enjoying large backlogs of orders that extend through the year as well as record-high prices for certain steel products used in construction. It’s a tight market, at least for 2021. Prices rose about 25% in the start of this year compared to the end of 2020.
The company also executes well, utilizing its mills at 84% capacity compared to a 68% industry average. It’s opening a new mill in Stinton, Texas, which will allow the company to sell into the western U.S., where there are no flat roll steel mills in the country (the furthest west sit near the western side of the Mississippi River). The plant will also allow the company to utilize more scrap steel from northeast Mexico, from a recycler there it acquired in August. Mexico will also be an end market for Stinton steel. Right now, Steel Dynamics sells about 1.3 million tons of steel annually and Stinton will expand that by about one quarter.
The company generated $2.83 EPS in 2020 and is projected to throw off around $8 a share this year. Part of that is a function of the tight market, which is seen easing off into 2022, when Wall Street anticipates per share earnings in the mid-$4 area. Steel is a cyclical market, but Steel Dynamics’ balance sheet is in good shape, which makes it better suited to weathering ups and downs in the economic cycle. Management is also evaluating adding four new steel coating lines – upstream operations that make it more of a vertically integrated company than other steelmakers. Details on that are scarce, but adding coating facilities probably allows the business to mitigate eventual price pressures as more steel production comes on line next year and industry backlogs abate.
Like our other materials pick this issue, STLD shares have already been enjoying investor enthusiasm. Shares have reached all-time highs recently, meaning there’s no pent-up selling demand to dampen the party. Prices have paused of late after running from 50 to 60 in April. Action now gives the look of consolidation for another leg higher. It’s speculative, but charts do suggest a run to 90 isn’t out of the question. Of course, that may not happen, and shares have been volatile enough (for a steel maker) that we should give shares some room to move around before accepting getting stopped out.
What to Do Now
Buy here and set a sell stop near 57.5, which will give shares room enough to range through the volatility projected by their Average True Range (multiplying the ATR by three and using that to determine the sell stop price is an effective method to account for normal price movements). Levels near 56 and the mid-54s also show support, with 54, where both the 40-day moving average and chart support sit, being the most important of the three.
Steel Dynamics, Inc.
Revenue (most recently reported trailing twelve months): $10.57 billion
Earnings per share (TTM): $3.74
All-time high share price: 66.27
Market cap: $13.45 billion
Recommendation: Buy at current price, with a sell stop near 57.5.
The ESG Three
The ESG Three are three technically strong stocks selected from the 200 most-held stocks in ESG funds. ESG funds include environmental stocks but tend to focus more on blue-chip companies drawn from every industry which are rated highly in social and governance aspects. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.
Invesco (IVZ)
What is it?
An investment manager that is one of the largest mutual fund and ETF companies.
Why is it ESG?
IVZ follows the U.K. and Japan stewardship code, which includes building long term ESG benefits for society through investments. ESG-specific funds own $36 million in shares.
Why now?
IVZ is setting up to be one of the firms left standing as asset management undergoes another round of consolidation. It has been buying mutual fund and ETF companies and expanding geographically. The market for specialized financial and wealth advice is expected to grow in the coming years. Shares have been on a steady rise for the past year and it’s cheap compared to peers, trading at 12 times earnings. Technically, the 30 area is a long-time high that may give resistance to the advance, especially as buying volume is slipping of late. A break through would be quite bullish. Support is near 26.
Mosaic Company (MOS)
What is it?
Mosaic is the world’s largest provider of phosphates and potash as fertilizer.
Why is it ESG?
Strong plans to mitigate water usage and carbon emissions. ESG-specific funds own $46 million in shares.
Why now?
Crop prices influence demand greatly, and the projection is for a strong year ahead in its main markets of Brazil, the U.S. and Canada. After slumping to 19 cents a share in 2019, earnings expectations are for $2.90 a share this year. Shares just pushed through resistance and have a path to the next major level of resistance at 40. Good support should be found near 32.
Ally Financial (ALLY)
What is it?
A U.S. financial services company.
Why is it ESG?
Strong employee retention rates and efforts to include underserved groups in its product offerings. ESG-specific funds own $71 million in shares.
Why now?
Ally’s main markets of auto loans and insurance are seen recovering after the pandemic hammered new and used car sales. Management is making efforts to expand into other areas of financial services, such as consumer banking. Shares blasted through long-term resistance at the start of the year and, being near all-time highs, have no real overhead selling waiting to come in. That clears a projected path to 71, for which a close at or over 55 would signal the likelihood of a fresh leg higher. Support should come in in the 49-48 range.
Our Greentech Timer
The past week brought the dramatically named Death Cross, where the medium-length moving average (usually the 50-day, though we prefer the green 40-day line here), falls below the long-term moving average, the (purple) 200-day line. The Death Cross tells us what we already know – Greentech is struggling right now.
We’re most bullish when the price of the index we use to track sentiment – the Wilderhill Clean Energy Index is above the (orange )20-day line and the 40-day moving averages and those averages are upward trending. Since we’re below them both and they’re both trending lower, we need to be highly cautious (and for what it is worth, neither of our portfolio picks this week are components of the Wilderhill index).
Primarily, our focus is on seeing the index get back above that 200-day moving average, a key signifier of long-term sentiment. Technically, signals are mixed about what’s happening in the week or two ahead. Two theories of price movements now suggest we’re due to see Greentech surrender another 25% before truly finding a bottom. Two other methods suggest we’re bottoming this week and are set up to turn upward again and test resistance at the 200-day moving average. In the face of mixed messages, the best position is not to bet on what hasn’t occurred yet and instead watch the market and continue to maintain reasonable sell stops that will preserve capital for the long run.
Current Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – I invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Always remember sell stops are essential to long-term success with our approach. With the Greentech Timer bearish, we’re holding uninvested proceeds as cash or in four-week T-bills (take your pick - neither generates any income right now). When bullish, we’ll invested unallocated cash into cleantech sector ETFs.
From time to time, we will also invest additional funds into our special opportunities portfolio, called Excelsior. That should be considered a separate portfolio from our Real Money Portfolio.
For now, as we build our SX Greentech Advisor positions, our update is brief.
| SX Greentech Advisor Real Money Portfolio | ||||||
| Stock | Buy Date | Buy Price | Price on 4/22/21 | Sell-Stop | Gain/Loss | Rating |
| Energy Recovery (ERII) | 5/5/21 | 21.07 | 18.23 | — | -13% | Sell/Sold |
| Freeport-McMoRan (FCX) | 5/19/21 | New | 41.16 | near 36 | — | Buy |
| Steel Dynamics (STLD) | 5/19/21 | New | 61.88 | near 57.5 | — | Buy |
| Trex (TREX) | 5/5/21 | 107.44 | 96.00 | near 93 | -11% | Buy |
Trex (TREX)
The past two quarterly earnings for Trex have been quite positive, but have come at bearish times, meaning shares have seen no bounce. Management gave a presentation at a European investor conference last evening and gives another today at a JP Morgan conference focused on building products. Hopefully making their case outside of bearish market days will draw in fresh buying. Shares are drifting lower but are holding support. We continue to keep our buy rating here, with our original sell-stop recommend near 93 remaining valid.
Energy Recovery (ERII)
As noted in our update last week, we got stopped out of ERII as shares fell on general market bearishness. The long-term fundamental case remains valid, but for now, shares face a couple of layers of immediate upside resistance. We recommended last week waiting at least the 30 days (for U.S. subscribers) to take the tax loss – ERII will need some time to provide a bullish entry for us in any case.
The next Sector Xpress Greentech Advisor issue will be published on June 2, 2021.