In my decades as an analyst, I worked at companies where we managed money in both growth and value investment styles. There were countless differences in how we picked stocks. But both had one thing in common...
Don't Overlook This Unloved Industry
By Joe Austin, senior analyst, Chaikin Analytics
In my decades as an analyst, I worked at companies where we managed money in both growth and value investment styles.
There were countless differences in how we picked stocks. But both had one thing in common...
We never had much interest in mining.
It was always a boom-or-bust industry that was too hard to handicap.
As growth investors, we didn't like the cyclicality. After all, cyclicality is the antithesis of growth.
Good growth businesses should do well no matter which way the economy is headed. And tech innovation is infinitely more interesting than folks digging holes in the ground looking for metal.
As value investors, we would kick the tires on just about any stock that was down. We constantly shopped what I called the "sale rack."
But value investors don't like external risks – especially things like commodity prices, geopolitics, and an occasional environmental disaster.
And in mining, those always loom large.
Value investors also want businesses where things like operational efficiencies or a financial restructuring can drive success. That's possible in mining. But it's hard.
Turnarounds in mining are tough. And you still have commodity prices, geopolitics, and occasional environmental disasters to worry about.
So mining was something we all basically ignored. And it wasn't like we missed out on much...
Just consider the SPDR S&P Metals and Mining Fund (XME). As the name implies, it's an exchange-traded fund ("ETF") that measures the metals and mining corner of the market.
Over the past nearly two decades, XME has heavily underperformed both the broad market S&P 500 Index and the tech-heavy Nasdaq 100 Index. Take a look...
But in 2020, I got a crash course in the industry...
An Australian private investment company focused on metals and mining hired me to manage relationships with its U.S. investors.
It was a fascinating job. Out of nowhere, I had a front-row seat to things I had never witnessed before.
The company had operations on four out of seven continents. And the senior executives had encyclopedic knowledge of mining projects across the globe.
I quickly learned that mining is a brutal, cyclical industry. But it's also one without which the modern world simply can't function.
Because of that experience, mining will always be on my radar.
And when the Power Gauge recently turned positive on XME, I had to take a closer look...
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Breaking Down XME
You see, XME has surged higher this year. It's up more than 20%. And it's trading around multiyear highs.
Right now, XME is also the highest-ranked ETF among the 21 market subsectors that the Power Gauge tracks. And it has a "very bullish" overall rating.
Digging deeper, XME holds 21 "bullish" or better stocks. It holds 11 stocks in "neutral" territory. And it has zero "bearish" or worse holdings.
That's a strong breakdown.
When I saw this, I first thought that all the strength must be coming from gold...
After all, gold is up more than 25% year to date. And that's on top of a more than 25% increase last year.
Gold is on a roll. But gold stocks also only make up about 15% of XME.
So gold is only part of the story...
XME Is More Than Just Gold Stocks
XME's biggest exposure is actually to steel – at roughly 43%. That's followed by coal at about 16%.
But where things get really interesting is to look only at the stocks within XME that the Power Gauge rates "bullish" or better...
Again, there are 21 of them right now.
Within that group, seven produce "specialty metals."
Those are blended metals with unique properties. They're sold into end markets like aerospace, defense, and other advanced technologies.
They're also a subset of the mining business that has little relation to digging holes in the ground. And specialty metals are a great growth business within mining.
Revenues for specialty metals are expected to surpass $185 billion this year. And they're expected to grow to more than $256 billion by 2032.
That's a compound annual growth rate of nearly 5%. And the end markets for specialty metals are particularly attractive from a growth standpoint...
Specialty metals carry commodity risk. But their demand is driven more by those end-market applications than by broad commodity trading cycles.
After specialty metals, there are five companies in "bullish" territory in XME focused on gold and other precious metals.
And as global conflicts and inflation continue to drive investors into gold, it's probably not a bad place to put money to work right now.
Meanwhile, there are five "bullish" or better companies in XME that either make or recycle steel.
On a global basis, the steel industry is squarely in the crosshairs of tariff wars. But here in the U.S., steel prices are up... and price increases are sticking. So far this year, steel is up about 25%.
The U.S. steel industry is also operating at 80% of capacity. So capacity constraints combined with upward pressure from tariffs means those price increases will likely stick.
Longer term, I doubt that investors' attitudes toward mining will ever change.
I now know a lot more about the mining industry than I ever did. But that hasn't changed my long-held views about investing in the industry.
Yet every once in a while, even the most hated of industries can have its day in the sun.
Right now, the Power Gauge is seeing opportunity in a business that most investors simply choose to ignore. As I said, it gives XME a "very bullish" rating today.
So pay attention to metals and mining.
Good investing,
Joe Austin
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.76%
10
14
6
S&P 500
+0.79%
127
273
99
Nasdaq
+0.98%
29
58
14
Small Caps
+0.93%
686
898
294
Bonds
-0.7%
Information Technology
+1.32%
30
34
4
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks are Bullish. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Materials
+4.09%
Consumer Discretionary
+2.88%
Industrials
+2.81%
Financial
+2.7%
Consumer Staples
+2.51%
Information Technology
+2.35%
Real Estate
+2.03%
Communication
+1.51%
Energy
+1.49%
Health Care
+0.95%
Utilities
+0.83%
* * * *
Industry Focus
Oil & Gas Equipment Services
0
13
19
Over the past 6 months, the Oil & Gas Equipment Services subsector (XES) has underperformed the S&P 500 by -24.26%. Its Power Bar ratio, which measures future potential, is Very Weak, with more Bearish than Bullish stocks. It is currently ranked #21 of 21 subsectors.
Indicative Stocks
AESI
Atlas Energy Solutio
ARIS
Aris Water Solutions
AROC
Archrock, Inc.
* * * *
Top Movers
Gainers
FSLR
+8.51%
CDNS
+5.1%
SNPS
+4.9%
TPR
+4.3%
ANSS
+4.04%
Losers
LEN
-4.5%
BG
-3.62%
DHI
-2.74%
CPB
-2.16%
NVR
-1.87%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
No earnings reporting today.
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
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