This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Dr. Copper to the emergency room -- stat!
In 2011, copper became the metal that everyone loved to hate. Pundits often referred to it as "Dr. Copper" for its reputed ability to diagnose the health of the global economy: High copper prices meant industry was humming; low prices meant it wasn't. Fears of a double-dip recession drove copper prices down, culminating in a 15-month low hit last week, and these fears took down the stocks of copper miners Freeport McMoRan Copper & Gold (NYSE: FCX  ) , Southern Copper (NYSE: SCCO  ) -- and even Chile's AFP Provida (NYSE: PVD  ) , which doesn't mine copper at all but has the misfortune to be located in a country that does.

Lately, however, Dr. Copper has made a surprising recovery from this bout of dementia. As the metal's price spiked 12% over the past few days, the Dow Jones Industrial Average (INDEX: ^DJI) trailed along behind with a more muted 8% gain -- but the prices of Freeport and Southern Copper spiked soared 20% and more. Seeing the train leaving the gate, investment banker BB&T Capital Markets this morning made haste to jump aboard -- and initiated coverage of Freeport with a "buy." But was it too late?

Let's go to the tape
Fools, no one would be happier to tell you that BB&T is a copper-mining wizard than I, or to sing the praises of this banker's ability to pick winners in the field of metals and mining. Problem is, much as I like the valuation on Freeport (and yes, I own the stock), seeing BB&T endorse my pick scares me. To understand why, you need look only at how BB&T's last two mining picks have worked out:

Company

BB&T Rating

CAPS Rating
(out of 5)

BB&T's Picks Lagged S&P by

Teck Resources (NYSE: TCK  ) Outperform **** 23 points
Cliffs Natural Resources (NYSE: CLF  ) Outperform **** 24 points

Digging for value at Freeport
Fools, when I bought into Freeport for my personal account, I did so based on the numbers. Numbers I still like. Numbers like these:

  • A single-digit P/E ratio of 6.0 -- attractive relative to long-term growth estimates of 15%.
  • Robust free cash flow generation of $5.5 billion in the past 12 months, nearly as much as reported net income.
  • A strong dividend yield of 2.8%.
  • A strong balance sheet highlighted by a net cash position of $840 million, beating the $1.1 billion debt burden at smaller Southern Copper, not to mention the $10 billion albatross weighing down rival Rio Tinto (NYSE: RIO  ) .

But much as I like Freeport's long-term prospects, I have to admit that seeing BB&T now associated with the stock gives me pause. This banker has proved itself to be simply terrible at timing entry points into mining stocks -- and Freeport may be no exception. Just yesterday, you see, China revealed that its own copper stockpiles currently surpass U.S. annual copper consumption. At 1.9 million tons, they're twice as high as what China was previously believed to hold. If this report means -- as some pundits are now predicting -- that China has all the copper it needs and won't need to pay up to buy more in the near future, then copper prices could take another tumble and take Freeport down with them.

Foolish takeaway
I'm willing to take that risk. Everything I know about investing, and everything I've learned since the Last Great Sell-off, tells me Freeport's stock price is too low to resist -- too cheap not to own. But in the near term, things could quite likely get ugly. So follow BB&T's advice and buy Freeport if you dare -- but don't say you weren't warned.

Fool contributor Rich Smith owns shares of Freeport-McMoRan Copper & Gold. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 180,000 members.

The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of AFP Provida. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2011, at 1:25 AM, garifolle wrote:

    " China revealed that its own copper stockpiles currently surpass U.S. annual copper consumption. "

    What do we really know about China's stockpiles?

    Somewhere else, we can read almost the opposite:

    China is craving for more copper, they can't find enough copper scratch anymore.

    China knows how the eyes are turned toward it to anticipate the price of Copper, so I doubt the it would make public it's real stockpiles.

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