These three stocks are all set for good near- and long-term growth, but for completely different reasons. Copper miner Freeport-McMoRan (FCX +1.72%) is set to benefit from increased demand for copper for use in renewable energy and hybrid/electric vehicles. Deere's (DE 0.98%) investment in precision agriculture technology makes it a leader in the smart farming revolution. And Stanley Black & Decker's (SWK +1.08%) management has pulled out all the stops in positioning the company for growth after a difficult period of external headwinds.
Freeport-McMoRan, electric vehicles, and renewable energy
The near- and long-term case for copper is simple. In the near term the post-pandemic recovery in the global economy will drive demand for the highly economically sensitive commodity. Over the long term the marginal increase in demand for copper will be driven by two hot technologies.
According to the International Copper Association, a battery-operated electric vehicle uses up to four times the amount of copper an internal combustion engine (ICE) vehicle does, and a hybrid electric vehicle uses up to double an ICE. In addition, using renewable energy to generate power requires four to five times the amount of copper than fossil fuel. It comes down to the increased need for copper wiring in electric/hybrid vehicles and in the transmission and distribution networks needed for renewable energy.
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Buying Freeport-McMoRan is a combination of confidence in management's ability to find new copper reserves and long-term assumptions about the price of copper. For an example of the sensitivity of earnings to changes in the price of copper, Freeport-McMoRan's management estimates that a $0.10 per pound change in the price of copper will result in a $390 million change in earnings before interest, taxation, depreciation, and amortization (EBITDA). For reference, EBITDA is forecast to be around $3.8 billion in 2020 and the current price of copper is around $3.60 per pound.
Commodity prices are always volatile and subject to wild swings due to near-term supply and demand considerations, so don't be surprised if there are corrections along the way. However, if you think long-term copper prices are going up in response to structural shifts in demand from EVs and renewable energy, then the mining stock may be a good buy for you.
Deere gets smart
The investment case for Deere's stock is based on the long-term demand for crops and the company's leadership position in smart farming technology. Just as with copper and Freeport-McMoRan, the price of commodities like corn, wheat, and soybeans is volatile. However, growth in long-term demand looks assured.
It's not simply a case of demand for crops for direct human consumption. Generally speaking, moving into the middle class for much of the world means going from a predominantly grain-based diet to one that incorporates more meat and protein.
That's something that implies significantly more demand for crops because of something called the feed conversion ratio. This is simply how much weight in feed it requires to produce the same amount of weight of animal protein. The feed conversion ratio is roughly 6 for beef, 3.5 for pigs, and 2 for poultry. Consequently, when a consumer shifts from eating a kg of crop to a kg of, say beef, it means 6 kg of crop feed will be required instead of 1 kg.
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Deere also has secular growth prospects. The company's precision agriculture solutions make it the leader in the smart farming technology revolution. Using Deere's digital solutions farmers are able to do everything from using satellites to guide machinery through to using big data analytics to decide what seeds to plant, how to prepare the soil, and how to protect and harvest the crop.
The technological improvements all speak to helping farmers maximize crop yield, something that's always likely to be in demand. As such, Deere is well set for the long term.
Stanley Black & Decker is clearing headwinds
A combination of unfavorable foreign exchange movements, trade tariffs, and rising commodity prices have created external cost headwinds to the tune of around $1 billion in 2018–2020. However, that hasn't stopped the company from wringing every bit of growth it can out of its end markets.
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Indeed, CEO Jim Loree has been busy buying businesses for growth while aggressively cutting costs. On the acquisition front Stanley bought the Craftsman brand from Sears and the tools business of Newell Brands in 2017. In addition, Stanley is set to buy the 80% of lawn and garden equipment manufacturer MTD. Meanwhile, the company's early investment in e-commerce paid off in 2020 as stay-at-home measures led to a surge in demand for DIY equipment.
With the external cost headwinds dissipating, internal cost-cutting measures in place, and the growth initiatives paying off, Stanley is set for a significant increase in earnings and free cash flow in the coming years. Analysts have earnings increasing at a double-digit rate for the next few years and the stock trading on just 15 times its free cash flow in 2022. Consequently, Stanley remains a very attractive stock for investors.
