Metals want to regain their shine after a punishing relapse. Time to take a bullish stance on metal mining giant BHP Group using a lead merger approach.
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Metal mania has turned into a metal melt. The red-hot rally that pushed prices to their limits has now become a full-blown fire sale. Fear of missing out (FOMO) soon turned into fear of getting out (FOGO). While copper and iron prices were both too high not long ago, the punishing slump has now pushed prices to similar extremes of pessimism. Time for the shine to return to these two metals in the coming months.
Let’s take a look at the two price charts to put things in perspective.
Copper is back at the level last seen in November 2020. Prices bounced at $3.25 on major long-term support.
Iron prices are also multi-year lows and more than 50% lower than recent highs of $225.
The speculative foam has undoubtedly been squeezed out of both markets. One could buy copper or iron futures to position for a rebound. That requires a fair amount of capital and more than a fair amount of risk taking, given the more speculative aspect of futures.
Instead, going long on stocks of the BHP Group (BHP) is a safer and more effective way to gain exposure to both iron and copper. This is especially true given the positive technical, fundamental and POWR ratings for the BHP Group going forward.
BHP is the world’s largest metals company according to Mining.com. Most of the income comes from iron and copper, with some exposure to nickel and potassium as well.
The latest earnings report shows revenues for the first half of fiscal 2022 totaled $30.5 billion, up 27% year-over-year. Iron ore segment revenues were up 12% year over year to $16 billion. Revenues in the copper segment were up 20% to $8 billion. Iron and copper together accounted for approximately 66% of total sales in Q1 2022 for BHP. So BHP is definitely correlated with fluctuations in both iron and copper.
Indeed, the last time iron prices hit this low (Q4 of 2021) marked a significant bottom in BHP stocks.
Technic
This correlation with copper and iron can be seen in the BHP stock price chart below. It tracked both the rise and subsequent decline in copper and iron prices to date in 2022.
BHP shares reached oversold values ​​on a technical basis before strengthening. 9 day RSI bounced out of the 20 area. MACD has moved from deep negative to positive and has just generated a buy signal. Bollinger Percentage B pressed below the zero line, but has since returned well above the zero line. BHP was trading at a large discount from the 20-day moving average. Shares were back at the crucial $47 support area.
All of these indicators used to be aligned in a similar fashion, marking significant short-term lows in BHP stocks. Each of these eventually saw BHP break well above the 20-day moving average before the rally finally came to a halt.
If history follows again, this latest rally may have more room to run. In addition, BHP was higher on Friday. This was on a day when most stocks, and metal stocks, were sharply lower. The sellers can finally get tired.
basics
BHP shares trade on both a P/E and P/S basis at trough prices.
The current P/E is now just over 8, the lowest multiple since the March 2020 Covid Crisis lows.
P/S is also approaching historically cheap valuations as it approaches 2x.
The last time both P/E and P/S were this cheap was the start of a major rally in BHP stocks (see price chart above). In addition, a dividend yield now above 11% with a payout ratio of just under 80% should provide a solid foundation for the stock for the foreseeable future, even given the potential for a dividend cut.
POWR rating
BHP is an A-rated–Strong Buy stock from a POWR perspective. It is also number two out of 36 in the industrial metal industry. Solid numbers across the board too. Opportunity to take advantage of a Strong Buy share at an attractive price.
Volatility is here to stay, at least for a while. Embracing volatility, rather than fearing it, is vital to long-term investing and trading success. The recent price action in iron, copper and BHP stocks certainly serves to validate the Warren Buffett principle to “be fearful when others are greedy, and greedy when others are afraid”. Now is the time to get a little greedy on BHP stocks.
We recently took a bullish position in BHP stocks in the POWR options portfolio using this merger approach. It combines both technical and fundamental analysis along with the power of the POWR Ratings system to find the edge and turn odds in your favor. Ultimately, trading and investing is all about opportunity, not certainty.
POWR options
What to do?
If you are looking for the best options trading for the current market, check out our latest presentation Trading options with the POWR Ratings. Here we show you how to consistently find the best option trades while minimizing risk.
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All the best!
Tim Biggam
Editor, POWR Options Newsletter
shares closed at $395.09 Friday, down $-3.70 (-0.93%). Year-to-date, it is down -16.20%, versus a % increase in the benchmark S&P 500 index over the same period.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR options newsletter. Read more about Tim’s background, along with links to his most recent articles.
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