Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

Cold Morning for Stocks; 4 charts I Can’t Believe (FCX, BTU, AA, GS)

Posted on | November 20, 2008 Time: 3:37 pm |

The opening this morning was destined to be poor given the jump in jobless claims, but there are several stocks in particular that have gone cliff-diving in a way I can’t truly comprehend.

First let’s look at Freeport-McMoRan, which is down about 11% this morning. Yes, copper continues to trade down this morning (currently about 4% down in the futures market), but FCX is now about 1/3 of book value and yields 11%:

I’ve included the 20 and 50 sma, even though they barely show up on the chart anymore. The slope of the lines alone is stunning. FCX’s total debt load is less than $7b, and none if it is really due for another 6 years.

Next up is Alcoa, another resource name that is seeing steep declines in the futures market. Aluminum is down modestly this morning (2.4%), but Alcoa like FCX has minimal debt loads, strong current account balances, and now goes for about a third of book value. Neither of these companies deserves to have revaluations to the tune of 75% in less than three months:

I continue to have the most fear of all over the fact that the sideline capital that is fundamentally-focused has yet to step into these markets. If and when they do, these 2 names should find strong support. It’s not about the commodity prices anymore. Shut down all the plants for 6 months, and it still doesn’t breach the margin of safety required to find at least $2 of assets for every investment dollar.

Peabody Suffering From Crude

Coal producer Peabody (BTU) is, as I’ve stated earlier, an ancillary to crude oil prices, especially in a market environment with little forward information. But Powder River Basin coal has actually held up in price over the past weeks, unlike northern Appalachian coal. I don’t think this fact is being represented in BTU shares, but that’s at the relative bottom of a long list of “un-discounted” information:

And Finally, ole’ Goldman Sachs, the stock quickly making myself and Warren Buffett look like knife jugglers. GS’s continued decline I still see as the market anticipating further shoes to drop (tail risk barometer) in the the broad category I’ll just call “financial assets”. The fact that Congress is a few days away from the end of their year (as I bite my tongue) is also spooking markets, as yet another potential backstop and catalyst exits from the market environment.

Parting Shot:

I’m going to make like a pig in the mud today, and just cover myself with the worst-performing crud in the Secular Trends Portfolio. The most important function any of us can do is to stress-test our core holdings in the most dire of potential scenarios. Our economic indicators are setting records left and right, and we need to approach our analysis with the same broad universe of potential outcomes.

disclosure: author does not hold positions in the companies mentioned.

  • Share/Bookmark
Category: Basic Materials, Economic Indicators, Fundamental Analysis, Metals, Mining, Secular Trends Portfolio
Tags: > > > > > > >

Comments