An Insider Is Bullish About This Mining Giant

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Freeport-McMoRan Copper & Gold (NYSE: FCX) recently completed its purchase of oil and gas companies McMoRan Exploration (which had previously been a related company) and Plains Exploration and Production. The company’s stock price plunged in early December when it announced the acquisitions, and is still down 22% from the beginning of that month as markets have worried that the diversification into oil and gas will reduce Freeport-McMoRan’s focus (in addition to a belief that the company overpaid for these acquisitions).

A closer look

Now a Form 4 filed with the SEC has disclosed that vice chairman of the Board James Flores purchased 1.1 million shares of the stock through a variety of affiliated limited partnerships on June 3 at prices generally ranging from $31 to $31.50 per share. These LPs now own roughly 1.8 million shares of the stock, in addition to over 4 million shares held by Flores directly. As such, this buying activity increases his company-specific risk, while economic theory holds that it is generally rational for an insider to diversify their wealth away from the company unless they are particularly confident in its prospects. This is one explanation for why stocks bought by insiders tend to narrowly outperform the market (read our analysis of studies on insider trading).

Freeport-McMoRan is generally seen as an indicator of broader economic activity (due to the dependence of copper demand on macro factors). The stock’s beta is 2.4, reflecting this. While the stock would certainly be a poor defensive pick, its quarterly dividend payments of 31.3 cents per share imply an annual yield of 4.4% at current prices, potentially making it quite appealing to income investors, though of course there would still be commodity and integration risks. Wall Street analysts project $3.65 in earnings per share next year, implying a forward P/E of 7.

In addition to insider trading activity, we also track quarterly 13Fs from hedge funds as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can see from our database of filings that billionaire John Paulson’s Paulson & Co. owned 9 million shares of Freeport-McMoRan at the end of March (see Paulson's stock picks).

Freeport-McMoRan’s peers

Peers for Freeport-McMoRan include Newmont Mining (NYSE: NEM) and Southern Copper (NYSE: SCCO). Newmont is primarily a gold miner (though it does also produce copper) and recent results reflect the poor conditions of the gold market at this time: revenue dropped 19% last quarter compared to the first quarter of 2012, while earnings fell 36%. It too has a high dividend yield (4.1%) with earnings multiples in the 10-11 range, so it may have overreacted to recent bad news. Revenue and earnings were also down at double-digit rates over the same period at Southern Copper, though the decline was shallower. The stock carries trailing and forward P/Es of 14 and 13, respectively, so the market expects a recovery at the business going forward.

We can also compare Freeport-McMoRan to macro-dependent companies such as Cliffs Natural Resources (NYSE: CLF) and Vale (NYSE: VALE), producers of industrial minerals. Cliffs has seen its stock price fall over 60% in the last year, as the iron ore company has reported net losses on a trailing basis. Wall Street analysts are bullish, with the target stock price being over 30% higher than current levels, but we think that we’d have to see better results from Cliffs. Vale trades at 16 times trailing earnings, but the sell-side is very optimistic about earnings here: the forward P/E, based on projections for 2014, is only 6 with the stock’s five-year PEG ratio being well below 1. Revenue has actually been up, though reduced margins caused net income to fall in Q1 2013 versus a year earlier.

Conclusion

Still, we would be wary of these peers, Cliffs and Newmont in particular, going by recent results. The large insider purchase at Freeport-McMoRan is certainly worth noticing, and while we aren’t fans of its acquisition it is possible that inefficiencies related to the diversification away from copper and gold has already been reflected in the stock price. With attributes such as a high yield we’d be interested in researching the company further.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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