Catch a Correcting Commodity

Monday delivered yet another gut check for believers in the commodities super-cycle. Even though I've been expecting prices to crack, I still found myself staring slack-jawed at the broad-based and brutal share price declines. The Energy Select Sector SPDR fell more than4.5%, while the SPDR S&P Metals & Mining ETF was slugged for over a 7% loss. Individual names naturally felt even more pain.

That brings me to today's list -- a selection of stocks that, in the course of Monday's turbulent trading, got seriously slammed. It's possible that some of these names were overheated, but I think we may be able to sniff out some value here as well.

Company

Yesterday's Nosedive

Bucyrus International

(16.4%)

Petrohawk Energy (NYSE: HK  )

(14.2%)

Excel Maritime (NYSE: EXM  )

(14.1%)

Freeport-McMoRan (NYSE: FCX  )

(12%)

Helmerich & Payne

(10.6%)

Arch Coal (NYSE: ACI  )

(10.5%)

PotashCorp (NYSE: POT  )

(10.4%)

Scary in the coalmine
Just recently, my Foolish colleague Chris Barker was praising both Bucyrus' strong margins and its rising backlog. Those numbers haven't changed. What has changed, though, is that this company's oasis-like appearance in the midst of a stormy market has proven something of a mirage. But that just has to do with market prices. If you suspect, as I do, that Bucyrus' business value hasn't suddenly deteriorated, then you may want to think about digging into shares of this coal excavation expert.

Then there's Arch Coal, which may not sport the best margins among coal miners, but may yet merit Foolish attention. Thanks to hiccups in South Africa and Australia, Arch's CEO has predicted a mounting supply deficit through the end of 2009. Metallurgical coal suppliers in particular are becoming takeover bait. Arch, meanwhile, is the second-largest coal producer in the country, and may be worth a second look.

Speaking of takeovers
Of all the companies on this list, the one looking most ripe for a buyout is Freeport-McMoRan. Sure, the firm's more behemoth than bite-sized, but there are even bigger metal magnates on the prowl. Fellow Fool David Lee Smith has tipped a certain Brazilian outfit as the most likely buyer, and I don't disagree. Not only is Freeport's copper cache compelling, it's also the biggest molybdenum producer in existence.

Whether or not a bid emerges in the ensuing months, Freeport is content to hike dividends and buy back shares. Shareholders stand to be rewarded in either case.

An energy baron battleground
Petrohawk soared this year on the discovery and subsequent hoopla surrounding the natural gas-rich Haynesville shale. If you missed out on this firm's ascent earlier this year, the E&P may have had you uttering expletives and profanities. Now Petrohawk shareholders are the ones cussing, as shares have dropped over 40% from their recent peak.

So is the Haynesville still hot, or just hype? That depends on whom you ask. During this quarter's conference call comments, XTO Energy's (NYSE: XTO  ) Bob Simpson declared certain estimates of the field's ultimate recovery potential "ridiculous." It turns out that was a dig at Chesapeake Energy's (NYSE: CHK  ) own, equally vocal Chairman, Aubrey McClendon. McClendon took a fair bit of time on his own conference call to rebut his "friend and colleague." Chesapeake stands by its estimate of 52 billion cubic feet of recoverable natural gas per square mile in the prime piece of the play.

Did a potash bubble just go pop?
Given my past comments about speculative froth in fertilizer, you may be surprised by what I'm about to say. The plain truth is that PotashCorp is looking pretty cheap. Higher future earnings for this fertilizer giant aren't just likely, they're guaranteed. As with those protracted iron ore negotiations, potash agreements are hammered out between suppliers and buyers. There is really no room for speculators to butt in and drive up prices.

Recent spot sales for potash have cleared $1000 per metric ton, more than double the company's average price realizations this past quarter. As argued in that piece, there's just no peak in sight. Given its barriers to competition and its single-digit forward P/E ratio, Potash may just make its way into this Fool's portfolio.

Chesapeake Energy is an Inside Value selection. Catch any of our Foolish newsletter content free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 05, 2008, at 4:21 PM, XMFSinchiruna wrote:

    Toby, you took the words right out of my mouth, which has also spent the past two trading days in the wide-open position as I can not believe the trouncing. I too had felt that a correction in oil was imminent, and that when it occured it might lead to all sorts of speculation about the end of the commodity bull. But I never thought I would see $80 FCX again, nor $11 AUY, nor SLW under $10.50!

    Coal stocks were in dire need of a correction after the run they had, but the value represented in Cleveland-Cliffs below $95 (it dipped below $90 today), or RIO at $26.... these are incredible long-term values in my opinion. RIO is trading at levels not seen since September 2007. With the benchmark price for iron ore locked in at dramatically higher prices for the year, there is no discernible logic to the market here. The last time Yamana traded below $11 in August 2007, gold was below $700. The US Dollar Index, which today managed to close above $74 (oooh!), was above $77 in September of 2007.

    These data indicate that the market has lost its way considerably. Swings of this magnitude that lack any fundamental cause represent buying opportunities.

    Thanks for a great and timely article!

    P.S. FCX mines a whole heap of gold as well. :)

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