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10 metal stocks likely to outperform in a rally Add to ...

Base metals are trading higher on the Federal Reserve's decision to expand its asset purchases to boost the economy.

A declining dollar index likely will increase investment demand for metals, especially precious metals.

Additionally, narrowing inventory levels will continue to support higher metals prices. The copper inventory on the London Metal Exchange has hit 52-week lows at 350,250 tonnes, and the metal has risen to 31-month highs.

Demand for copper will outstrip supply by 367,500 tonnes by 2011, according to median estimates of 12 analysts polled by Bloomberg, while the International Copper Study Group estimates a deficit of 435,000 tonnes during 2011.

Meanwhile, aluminum producers may have to boost output by almost two-thirds to meet 5.3 per cent demand growth over the next decade, Bloomberg reports, citing a statement by Rio Tinto. In addition, the launch of new commodity ETFs will continue to boost metals stock prices.

Given these fundamentals, metals stocks likely will continue to outperform broader markets in December. During November, the S&P 500 Index gained 3.7 per cent, while the SPDR S&P Metals and Mining ETF surged 9.1 per cent.

The following 10 stocks have high betas. In other words, they are more volatile than the stock market. That means they likely will outperform their peers in a rally. The stocks are listed from lowest beta value to highest.

AK Steel is a producer of flat-rolled carbon, stainless and electrical steels, primarily for the automotive, appliance, construction, and electrical power generation and distribution markets.

High steel prices are necessary for AK Steel to be able to maintain its profit margins, as the company is not integrated for iron ore and coking coal supplies. Last week, the company announced price increases for carbon steel products on increased demand and higher raw material prices. Domestic steel prices will have to rise further to offset anticipated increases in raw material costs, which have been generating volatility in the stock, giving it a high beta value.

Another reason for the high beta value is that the company's dividend yield of 1.42 per cent is lower than Nucor's 3.70 per cent, Worthington Industries' 2.81 per cent, and Steel Dynamics' 2.13 per cent. Even though U.S. Steel has a lower dividend yield - 0.46 per cent - its stock has a lower beta because of the company's integrated character. Being a nonintegrated steel maker, AK Steel is a more volatile stock subject to the impact of raw material prices.

AK Steel is expected to lose 64 cents a share during 2010, and report earnings of 42 cents a share in 2011, in comparison with a loss of 68 cents a share in 2009, according to analysts polled by Bloomberg. Over the past year, the stock declined around 26 per cent, while its peers gained around 32 per cent, underscoring the impact of increasing raw material costs.

Of the 13 analysts covering the stock, two recommend buying it, 10 advise holding it and one advises selling it.

Haynes International is a producer of nickel- and cobalt-based alloys in sheet, coil and plate forms.

The stock's price movement depends on the end market rather than the movement in metal prices. Demand from the aerospace, defense, and industrial markets is pivotal to revenue generation.

The stock likely will provide attractive returns to investors on an improving backlog, robust margins, and strong capital and operational efficiency. During the third quarter, utilization rates jumped by 10 per cent quarter over quarter, while the backlog grew 6 per cent.

Analysts polled by Bloomberg expect the company to report earnings of $1.09 a share for 2010 and $2.33 a share for 2011, a significant turnaround from the loss of $3.09 a share registered in 2009.

Over the past year, the stock advanced about 55 per cent, while its peers gained only 33 per cent. Of the seven analysts covering the stock, four recommend buying it and three advise holding it.

Horsehead Holding, a stock with upside, is the largest zinc producer in the U.S. and a leading manufacturer of value-added zinc products.

Horsehead's acquisition of metal-waste recycler INMETCO has added to Horsehead's revenue stability.

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