Timing is everything in the stock market, and those who read my analysis of Metal Management (Nasdaq: MTLM ) know that commodity-based businesses are all about timing. Prices can fluctuate rapidly and without warning. And if your business is beholden to a commodity such as steel, so is its stock price. Of course, if you happen to be holding an oil-based business such as ExxonMobil (NYSE: XOM ) , BP (NYSE: BP ) , or ChevronTexaco (NYSE: CVX ) , you have little to worry about. The geopolitical concerns that have raised oil prices probably won't be going away anytime soon.
But steel is not so resilient. When prices cratered from $400 per ton down to $240 per ton over a single quarter (January through March of 2005), it stood to reason that Metal Management's stock might fall by the same 40%, since the company's revenue stream (and its relative strength) is tied to prices in the market.
This is the real trick to handling a stock like Metal Management. You must stay on top of commodity prices, and that's one of the reasons I learned not to invest in such companies anymore. Commodities markets are fluid and relatively unpredictable, privy to short-term price fluctuations and widely subject to global supply and demand -- which itself is influenced by a host of factors, including geopolitical conditions in prominent markets and expectations on trade relations and compacts. I got stung by both Metal Management and Darling International (NYSE: DAR ) this past quarter. It occurred to me that if I have to stay on top of commodity prices, then, well, it is a lot like market timing, as opposed to investing.
On the positive side, Metal Management is a different animal from what it was a few years ago, when falling steel prices sent the company into bankruptcy. Now, company executives have wisely used the good times to pay off debt. They are even paying a dividend, although given the more difficult environment they are now in, I'd just as soon see them suspend those payments.
Those looking to invest, therefore, should probably do just that: Stay away from something you have to watch every day. For me, commodity-based businesses are now strictly verboten in my portfolio.
Steel yourself for further Foolishness:
Fool contributor Lawrence Meyers sold his shares of MTLM in April and will never go near a steel factory, or steel stock, again. He owns no other stocks mentioned herein.