We recently compiled a list of the 10 Best Materials Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Freeport-McMoRan Inc. (NYSE:FCX) stands against the other materials stocks.
When compared to high growth technology stocks, materials stocks are among the most stable ones on the market. These are often sizeable firms whose performance is tied to the broader economic output. As a result, materials stocks offer investors a chance to ensure that their investments are not affected by the pitfalls of volatility that often accompanies high growth stocks. This volatility is often present in high growth sectors where firms face low barriers to entry, a high level of product diversification from peers which leads to more competition, and even though metals stocks fluctuate with the economy, their sizeable nature and high investment requirements mean that once they’ve set up shop, they can benefit from somewhat assured demand.
At the same time, their sizeable business operations also make materials stocks pay out handsome dividends. We took a look at some such stocks as part of our coverage of 12 Best Materials Dividend Stocks To Buy Now. Within this list, the top hedge fund materials dividend stocks had a dividend yield that ranged between 0.68% to 5.28%. The average dividend yield was 2% while the median yield among the 12 materials stocks was 1.88%. The top materials dividend stock, which had a yield of 5.28% ranked at 9th place, and it is one of the biggest chemicals companies in the world.
To analyze materials stocks’ performance and see what the future might hold for them, a relevant approach is to check how the commodities market is performing. Broadly speaking, materials stocks can be divided into those that sell construction materials and those that deal in metals. Starting from construction materials, the broader construction industry’s performance right now is somewhat mixed. The turmoil in the office real estate sector, driven by high interest and vacancy rates, continues to threaten contagion. Similarly, while the status of the residential sector isn’t as troubling, higher rates have created some interesting trends. Median housing prices in America soared to a record high of $419,300 in May; however, at the same time, housing supply also grew to 1.28 million to mark an 18.5% annual growth. Higher rates lead to homeowners forking out more for their property, and data from Redfin shows that the value of US homes soared to $47.5 trillion by December 2023.
Overall, US construction spending fell by 0.1% in May to sit at $2.1 trillion. For materials stocks, a slowdown means that their share prices are depressed. However, when compared to other markets, such as agriculture, not all is doom and gloom in construction. Industrial construction for warehouses boomed in 2022 and tapered off in 2023 due to high interest rates. Now, the Dodge Momentum Index, which measures non residential building project planning, increased by 2.7% to 179 in May. However, this, like the broader industry, also came with a caveat. Sequentially, data center construction planning spurred by AI and retail projects led commercial planning to jump by 5.5%. However, the healthcare and public project slowdown led to institutional planning to drop by 3.4%. This data shows that businesses are investing in growth for 2025 as they expect interest rates to fall. At the same time, the Biden-Harris Administration’s Inflation Reduction Act and the CHIPS And Science Act coupled with the Bipartisan Infrastructure Act allocate roughly $2.4 trillion to a wide variety of projects ranging from bridges, roads, semiconductor production, and EV production facilities.
In a similar vein, the Inflation Reduction Act is also expected to spur demand in America for some metals. As mentioned earlier, metals demand is the second aspect of materials stocks’ valuation. Starting from lithium, data from Bloomberg shows that lithium iron phosphate battery cells in China now cost $54/kWh to mark a 43% annual drop. These prices are dropping since the lithium industry invested heavily in production, which flooded the market with batteries and led to the cost of a cathode falling to 30% of a battery’s total cost as compared to the previous value of 50%. Lower prices mean that lithium miners struggle to maintain their margins, which naturally doesn’t sit well with investors. Naturally, it’s unsurprising that one of the biggest lithium producers in the world has lost 34% year to date and 54% over the past year. This stock ranked 1st on our list of the best 10 Best Lithium and Battery Stocks to Buy Now.
However, while lithium has tumbled, copper has soared. Copper futures that trade on the COMEX are up by 17.8% year to date and 21% over the past year. This surge has come on the back of several catalysts. One of these, unsurprisingly, is AI. AI and the global push to electrification can add 10 million tons of copper demand over the next decade with one third attributed to the electric vehicle industry. Another third is for electricity generation and associated use cases, while the remaining is expected to stem from AI and data centers. Copper stocks in LME registered warehouses dropped by 35% in May from October, and a tighter market leads to higher prices which are beneficial for copper companies.
The next two metals, aluminum and iron, are also interlinked with industrial production. This leaves them highly sensitive to interest rates, and also reduces the impact of the tailwind from electrification. Therefore, iron ore prices have continued to remain volatile this year, as after dropping by 4,1% on July 10th, it surged by 3.6% on the 11th. This surge came as Chinese homebuilding activity continues to decline, and Goldman Sachs isn’t too optimistic for the prices as it expects them to sit at $100 per ton this year. The bank expects aluminum prices to sit at $1.27 per pound by 2024 end, up from the $1.24 per pound as of July.
Looking at the broader determinants of materials stock performance, while they offer the potential of earning dividends, a chance to ‘peg’ the portfolio to economic growth, and enable risk hedging, there can be some drawbacks as well. Materials stocks are highly sensitive to business cycles due to their close link with the broader economic performance (you can learn more about the different stages of the business cycle by checking out 10 Best Consumer Cyclical Stocks To Buy Now). These stocks are also tied to the price of materials, so if lithium prices fall due to a supply glut, then companies that mine lithium can suffer too. Finally, geopolitical crises (such as the one in the Middle East) and regulations on industries such as mining can also act as headwinds.
Adding to this performance, the current economic environment isn’t particularly favorable for materials stocks. Not only are interest rates high, but estimates show that we might be in the late stages of the business cycle where economic activity tapers off. Taking a look at the performance of materials stock indexes made of stocks part of the S&P and Dow Jones, and one operated by Morningstar Financial shows limited gains. The three indexes are up by 6%, 3.99%, and 9.89% over the past 12 months, respectively. Year to date, these stock indexes have gained 3.13%, 1.32%, and 1.71%. All three materials stock indexes had bottomed out in October 2023. October was one of the most important months for the stock market, as it came with a fresh set of comments from Fed Chairman Jerome Powell who indicated that additional interest rate hikes might be needed to balance out the labor market and control inflation. Investors, on the other hand, had expected the Fed’s interest rate hiking cycle to close. However, as Chair Powell’s remarks turned out to be too cautious and no interest rate hikes followed, the materials stock indexes continued to post gains.
Summing it up, while Wall Street is far more pessimistic about the Fed’s rate cuts in the second half of 2024 compared to the first half, the one thing that everyone can agree on is that rate cuts will take place. Considering the factors that affect materials stock performance that we’ve discussed above, it might be worth it to see what the hedge funds are doing. We’ve done so today, so read on below to see the best materials stocks to buy according to hedge funds.
Our Methodology
To make our list of the best materials stocks to buy according to hedge funds, we ranked the 40 most valuable materials stocks in terms of market capitalization by the number of hedge funds that had bought the shares in Q1 2024. Then, we looked at popular materials ETFs to further refine the list, and ranked the stocks in them by the number of hedge funds too. The materials stocks with the highest number of hedge fund investors were chosen.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A large open-pit copper mine with heavy machinery extracting minerals from the earth.
Freeport-McMoRan Inc. (NYSE:FCX)
Number of Hedge Fund Investors in Q1 2024: 86
Freeport-McMoRan Inc. (NYSE:FCX) is a metals miner that focuses primarily on copper. Its Grasberg mine is one of the world’s biggest mines, which provides Freeport-McMoRan Inc. (NYSE:FCX) a great opportunity to capitalize on any growing demand. The site, coupled with others allows the firm to gain an early foothold in the market which is notorious for high set up costs and long lead times. These mean that Freeport-McMoRan Inc. (NYSE:FCX)’s potential customers might take years to reach profitability or production, allowing the firm to establish key industrial partnerships. At the same time, since the firm’s markets are tied to economic output, while high rates affect end demand, any potential cuts also carry the potential to inject fresh life into the shares. This was evident in July 2024 when the June payrolls report showed that the data for May was revised downward by 54,000 – bolstering the view for a Fed interest rate cuts. As a result, Freeport-McMoRan Inc. (NYSE:FCX)’s stock jumped by more than 1%.
As for its copper projects, here’s what Freeport-McMoRan Inc. (NYSE:FCX)’s management had to say during the Q1 2024 earnings call:
Moving to copper markets, starting on Slide 6, the growing intensity of use of copper in the global economy is supported by secular trends, particularly in electrification. Copper is a foundational, essential metal when it comes to electrification, and the world is becoming more and more focused on copper-intensive energy applications. New massive investment in the power grid, renewable generation, technology infrastructure and transportation are driving increased demand for copper and forecasts call for above-trend growth and demand for the foreseeable future.
This is occurring at a time when there are constraints on existing supplies, an absence of major new copper development projects and extended multiyear lead times for supply development, pointing to tight market conditions for an extended period of time. Copper producers, including us, at Freeport have been citing physical market tightness for some time. And in the last several weeks, the copper price has risen to reflect the reality of the market situation. Based on historical periods of above trend growth in demand, we may be in the early stages of a repricing for long-term copper prices. And we illustrate this on Slide 7, where we show how copper prices responded 20 years ago when China emerged as a major consumer of copper. You can see on this chart that within 12 months, the copper price increased by 40% and was up nearly four times within a three-year period.
During 2023, the secular drivers for copper demand provide a growth in demand despite weakness in some of the more cyclical drivers of copper demand. In the fourth quarter of last year, industry announcements of sizable supply disruptions tightened the market significantly. This is clearly evident when you look at the physical concentrate markets where smelters drop TC, treatment charges, sharply as a result of the shortage of concentrate supply. Notably, recent manufacturing data points also indicate that the global economy is recovering. Recently improved macroeconomic sentiment, combined with physical market conditions have driven prices higher, copper prices higher year-to-date, and many analysts are now projecting significantly higher copper prices in the future.
Overall FCX ranks 1st on our list of the best materials stocks to buy. You can visit 10 Best Materials Stocks to Buy According to Hedge Funds to see the other materials stocks that are on hedge funds’ radar. While we acknowledge the potential of FCX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FCX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
