Worst stocks to reverse with commodity profits rising 18%

Commodity stocks, lagging behind the Standard & Poor’s 500 Index (CME:SPZ13) by the most in 15 years, are poised to rally as analysts estimate profits will rise almost twice as fast as the rest of U.S. industry in 2014.

Mining companies and chemical producers in the S&P 500 will increase earnings by 18% in 2014, compared with a 11% gain for the equity gauge, according to the average of more than 9,000 estimates compiled by Bloomberg. Commodity stocks were the worst-performing S&P 500 group during the first six months of the year, before climbing the most in almost two years last quarter. Raw-materials companies are on track to lag behind the U.S. stock index for a third straight year, the longest stretch since 1998.

Bulls say stocks such as Freeport-McMoRan Copper & Gold Inc., DuPont Co. and LyondellBasell Industries NV will continue to rebound as manufacturing expands in China, Europe and the U.S., spurring the fastest profit growth in three years for raw- material producers. Bears says the gains will be short-lived because the commodities super cycle is over and demand for metals and chemicals isn’t growing fast enough at a time when everything from copper to nickel and corn head into surpluses in the next year.

“There’s still problems, but I think it’s time to buy,” Don Hodges, whose Hodges Fund has beaten 99% of its peers in the past year, said in a phone interview. The Dallas-based firm oversees $1.3 billion. “China over the next 20 years is going to be an awesome economy requiring all kinds of infrastructure.”

‘Shockingly Low’

Mining stocks are bargains after declines in the past two years, said Hodges, who recently bought shares of Freeport- McMoRan and U.S. Steel Corp. The selloff since the start of 2011 has erased almost half of the market value from a gauge of seven S&P 500 metal producers, data compiled by Bloomberg show. The price-earnings ratio for Phoenix-based Freeport, the world’s largest publicly traded copper producer, has dropped 24% since the beginning of 2010 to 11.5.

“I see the downside risk very low at these prices,” he said. “They’re shockingly low. It’s as if there will never be another good day, and I think there will be.”

The best year for American auto sales since 2007 is boosting profits at Charlotte, North Carolina-based Nucor Corp., the largest U.S. steelmaker by market value. The price of hot- rolled steel coil in the U.S. Midwest, a benchmark product, climbed 1.6% to average $645 a short ton last quarter, from $635 in the same period last year.

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