Top 5 Cheap Miners Poised to Explode

Given the weak Chinese economy, many commodities are stuck in a prolonged bear market that has driven down their prices and bearish sentiment absolutely permeates throughout the industry. Because of the negative sentiment, many mining stocks have been beaten up and highly shorted, two conditions that provide for substantial short squeezes or rallies if good news were to occur. In the following article, we analyze five cheap miners, Kinross Gold Corporation (USA) (NYSE:KGC),  Freeport-McMoRan Inc (NYSE:FCX), Barrick Gold Corporation (USA) (NYSE:ABX), SunCoke Energy Inc (NYSE:SXC), and Vale SA (ADR) (NYSE:VALE), whose stocks could explode given the right conditions, based on the sentiment of the top investors tracked by Insider Monkey.

Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Kinross Gold Corporation (USA) (NYSE:KGC)

 – Number of Hedge Fund Holders (as of September 30): 21
– Total Value of Hedge Fund Holdings (as of September 30): $148.37 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 7.50%

After being a hedge fund favorite between 2008 and 2011, gold is now one of the least-liked commodities among hedge funds. Gold futures prices have fallen from a high of over $1,800 per troy ounce in 2011 to $1,073 today. The GLD ETF is no longer one of the largest ETF’s on the market and bullish investors are beginning to lose faith in the investment thesis. Although shares of many gold miners such as Kinross Gold Corporation (USA) (NYSE:KGC) have declined along with gold futures prices, they can make a quick rebound if any number of geopolitical events pop up. Given the low crude prices and the general instability in the Middle East, the probability of an event that causes gold to spike is relatively high.

#4 Vale SA (ADR) (NYSE:VALE)

 – Number of Hedge Fund Holders (as of September 30): 24
– Total Value of Hedge Fund Holdings (as of September 30): $140.9 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.10%

Given that Brazil is in its worst economic downturn since the Great Depression, it’s not surprising that shares of Brazil’s largest commodity company, Vale SA (ADR) (NYSE:VALE), are down by almost 60% year-to-date. A weaker Brazilian real lowers Vale’s U.S dollar earnings. Not helping matters is the fact that iron ore prices are also hovering near a ten-year low. Weak iron ore prices decrease Vale’s cash flow and poison any optimistic sentiment around the stock. Despite the bad conditions, Vale is a prime short squeeze candidate as the company trades at a dirt-cheap price-to-book valuation of 0.37. Any good news will prompt some short covering.

#3 SunCoke Energy Inc (NYSE:SXC)

 – Number of Hedge Fund Holders (as of September 30): 35
– Total Value of Hedge Fund Holdings (as of September 30): $169.69 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 33.40%

Although SunCoke Energy Inc (NYSE:SXC) shares have retreated by 83% year-to-date as weak thermal and metallurgical coal prices weigh on the company’s coal logistics business, many hedge funds still believe in the company. Of the 730 elite funds that we track, 35 were long around 33.4% of the company’s float on September 30. The large number of funds long SunCoke, along with the company’s cheap price-to-book ratio of 0.69 makes SunCoke Energy a short squeeze candidate should any good news materialize (such as rising natural gas prices or coal prices).

#2 Barrick Gold Corporation (USA) (NYSE:ABX)

 – Number of Hedge Fund Holders (as of September 30): 40
– Total Value of Hedge Fund Holdings (as of September 30): $937.59 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 12.70%

Although Barrick Gold Corporation (USA) (NYSE:ABX) is one of the leaders in the industry, its shares have not done well in 2015, with shares down by 26.89% year-to-date. Nevertheless, Barrick shareholders are in a better position than other gold investors, as analysts expect Barrick to be profitable next year and the company pays a dividend with an annual yield of 1.03%. Given Barrick’s cheap price-to-book ratio of 0.92 and forward P/E of 16.92, look for shares to surge if gold futures prices make a convincing bottom and head north again.

#1 Freeport-McMoRan Inc (NYSE:FCX)

 – Number of Hedge Fund Holders (as of September 30): 44
– Total Value of Hedge Fund Holdings (as of September 30): $1.39 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 13.80%

The weak Chinese economy is certainly having an effect on Freeport-McMoRan Inc (NYSE:FCX). Because China consumes 40% of the world’s copper production and makes up a substantial portion of crude oil growth demand, copper and crude prices have gone south as China’s economy has weakened. The lower copper and crude prices have caused Freeport-McMoRan shares to fall by almost 70% year-to-date and shares of the company now trade at 0.68-times the company’s book value. Although cheap can always get cheaper, Freeport-McMoRan Inc (NYSE:FCX) will surge if China’s economy shows signs of recovering or if Saudi Arabia pares back oil production.

Disclosure: None