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West Texas Intermediate crude is down more than 40% from its multi-year peak last year.
David Paul Morris/Bloomberg
Oil and copper stocks have gotten cheap, and while they can always get cheaper, buying soon should pay off if the economy is near bottom.
O
Energy Select Sector SPDR ETF
(ticker: XLE) – home to
chevron
(CVX),
exxon
Mobil (XOM) and a host of oil producers and refiners – is down about 16% from its multi-year peak in late 2022.
ETF SPDR S&P Metals and Mining
(XME), home to copper miner
Freeport-McMoRan
(FCX) and metal manufacturer
nucor
(NUE), is down about 30% from its multi-year peak in early 2022.
The dips in equity prices came as commodity prices fell, with West Texas Intermediate crude, the US benchmark, falling more than 40% from its multi-year peak last year. Copper is down more than 20% from last year’s peak.
Those highs were hit during a surge in post-lockdown economic demand, but inflation spurred central banks around the world to raise interest rates last year — and US economic growth is slowing. Now these shares are cheap.
The energy fund’s aggregate price/earnings multiple has dropped to just under 10 times, according to FactSet, from around 13 times at one point in 2022. The metal mining fund’s earnings multiple has dropped to around 8.5 times, up from about 11 times a few months ago.
The funds are trading just above their lowest multiples for the last five years. But its even lower valuations mean the market is discounting the possibility of a recession and analyst expectations that sales and earnings per share will decline year on year in 2023.
The Federal Reserve is expected to take a break from raising interest rates this month – or later this year – which would allow economic demand to fall. This could eventually drive up the price of oil and copper and, in turn, stocks.
Oil price is already holding the line at a key level. WTI crude, at around $70 a barrel, continues to find enough buyers to keep it above the 1960s range, where those buyers have consistently stepped in to support the price since late 2021.
And the price of copper, at around $3.71 a piece, is receiving buying support above the $3.30 level where it has held above since last summer.
“We are coming to the end of a global economic downturn and you want to buy these [stocks] when you think the other side is closing in,” says Keith Lerner, co-head of investments at
truist
.
“You want to see earnings trends really starting to show.”
At the moment, oil analysts expect sales and earnings to stabilize next year. The analysts’ aggregate EPS forecast for the energy fund companies is $7.87 this year, down from $10.38 last year. But the drop should moderate next year to $7.83, down by not even 1%.
For copper, analysts expect the mining fund’s EPS to fall to $5.45 this year from $7.08 last year. They see a softer drop to $4.98 next year and a modest recovery to $5.25 in 2025.
Investors would not only be able to enjoy gains in the share price, but would also receive some extra return through dividends. At the moment, the energy fund’s per-share dividend yields nearly 4% of the fund’s current share price, a yield that analysts expect to increase in coming years as earnings eventually pick up.
For the mining fund, this year’s dividend yield is just over 2%. But dividend payouts are expected to increase with earnings growth, and they would also get an extra boost if earnings forecasts also increase.
These actions are looking more and more like purchases. Any further declines should make investors even more interested in them.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
