The tumultuous times currently prevailing around the world have not been kind to most sectors. Almost all sectors have been adversely affected due to the myriad of problems affecting the financial markets, namely geopolitical tensions, rising interest rates, supply chain constraints, inflation, and muted demand.
Further, the coronavirus lockdowns made a comeback in China.
The surge in COVID-19 cases in China and the country’s zero-COVID stance have resulted in frequent complete lockdowns in the manufacturing powerhouse. This has had an adverse ripple effect on the prices of key metals, namely copper, zinc, and lead, which have all come down from their 52-week highs.
Still, the SPDR S&P 500 Metals & Mining ETF (XME) is up 25.3% so far this year compared to a roughly 10% decline witnessed by the S&P 500 (SPY). Further, the sanctions on Russia, a major steel producer (producing 3.9% of the global supply), and China’s decarbonization policies are also likely to lend support to metal prices.
In such a scenario, stocks in the metals sector can be a reasonable choice for investors looking to hedge their portfolios against uncertainties. Let’s look at two stocks from the sector which can be investible ideas.
Wheaton Precious Metals (NYSE: WPM)
Canada-based Wheaton Precious Metals is a precious metals streaming company with a portfolio of long-life, low-cost assets. Its primary business involves providing mining companies with an initial payment to help develop a project. In exchange, it receives the right to purchase a portion of the production at a fixed cost.
The company’s fourth quarterly results were muted, with both revenue and earnings missing estimates. Revenues for the quarter came in at $278.2 million, down 2.8% from the prior year and lower than the consensus estimate of $286.7 million. Earnings per share (EPS) for the quarter stood at $0.29, which denotes a decline of 12% from the previous year. Further, the figure failed to surpass the consensus estimate of $0.31.
However, the company’s strong guidance for 2022 and the next decade can result in increased profitability if the targets are met. For 2022, the company’s attributable production is expected to be 350,000 to 380,000 ounces of gold, 23.0 to 25.0 million ounces of silver, and 44,000 to 48,000 GEOs3 of other metals, resulting in the production of approximately 700,000 to 760,000 GEOs3. In five years and 10 years, the company forecasts average annual production to be 850,000 GEOs3 and 910,000 GEOs3, respectively.
Recently, RBC Capital analyst Josh Wolfson reiterated a Buy rating on the stock with a price target of $52, implying upside potential of 16.5% from current levels.
The consensus among analysts is a Strong Buy based on 11 Buys and one Hold. The average Wheaton Precious Metals price target of $55.84 implies upside potential of 25.1% from current levels. Shares have gained 3.5% over the past year.
Nucor Corporation (NYSE: NUE)
Charlotte, NC-based Nucor is a manufacturer of steel and steel products, including carbon and alloy steel, beams, sheet and plate steel products, and more. Further, it is also the biggest recycler of scrap in North America.
The company’s latest first-quarter results were strong, as both revenue and earnings surpassed estimates. Revenues for the quarter came in at $10.49 billion, up 49.5% from the prior year and above the consensus estimate of $10.48 billion. The company reported an EPS of $7.67, which denotes a significant year-over-year jump of 147.4%. Further, the figure comfortably topped the consensus estimate of $7.29.
Notably, the company’s outlook for the second quarter remains optimistic, as it forecasts the quarter to be the most profitable in its history, driven by increased profitability in the Steel Products and Steel Mills segments.
Recently, Argus Research analyst David Coleman reiterated a Buy rating on the stock. The analyst, however, raised the price target from $140 to $190, which implies upside potential of 28.1% from current levels.
According to the analyst, the company’s strong first-quarter results coupled with robust guidance give it a solid footing for growth. Moreover, the analyst believes the stock is trading below its five-year historical average.
Overall, the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on two Buys and four Holds. The average Nucor price target of $163.67 implies 10.4% upside potential from current levels. Shares have gained 77.5% over the past year.
With the uncertainties in the global economic landscape likely to persist in the near future at least, the metals sector can act as an effective hedge for investors as the supply chain constraints, sanctions on Russia, and Chinese lockdown measures are likely to hit supply and result in a rise in prices of essential metals.
In such a scenario, these two companies in the metals sector could be a reasonable choice for investors.
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