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Hello everybody
Phelps Dodge (PD) price is at an interesting juncture today, and your
comment is invited:
a. MACD divergence with price, bullish bias (see chart)
b. Price at the neckline of a completed intermediate term H&S pattern on
daily/weekly/monthly charts.
These are two among many - but this technical combination is presented
because in my experience, it is dangerous.
A bearish MACD divergence + H&S penetration broke Gillette, Nike, Sun Micro
in 1997 - the latter 2 lost about 40% of their market value since that event
in a matter of weeks - and have not yet recovered, months later.
The technical case: If the neckline holds, we're looking at a better than
25% jump in PD.
The fundamental case:
1. Note the close historical market price correlation with HG (Copper
futures). The equity market perceives PD as a proxy for copper since it is
the largest US based copper miner. However, slightly over 45% of the
company's revenue comes from non-copper product groups; and/or product
groups that enjoy significantly uncorrelated business cyclicality.
2. Every cent move in HG prices, or every cent saved in HG related mining
costs impacts PD's pretax revenue by $18 million. Per equity analysts, HG
Copper prices supposedly are headed south courtesy Asia and higher LME
stockpiles. Well, fact of the matter is that the company has been
a. cutting higher-cost HG production,
b. closing mines worldwide to offset inventory buildup, and
c. increasing share of non-copper contribution such that although copper
prices have fallen back to 1992-93 levels, operating cash flow has doubled
from about $6 to over $12.50 per share in that period.
This last statistic obviously points to smart hedging and product
diversification as culprits...
While on hedging, the 6/5/98 COT report shows Commercials are the largest
longs - heavily long actually - spec funds are heavily short.
Sure, P/E @ ~8 times is not the least achieved in the past decade (low side
was 3.x in 1988) and price/sales is still "only" 0.93, not the least in its
history - price/book is about 1.4, about average for the last decade - so
things can go lower.
Valuation was never a strong catalyst for timing - but this is looking more
and more juicy to me...the lower it goes, the better it gets. ROI is over
16% consistently, operating margins are obviously going up, debt continues
to be less that 30% of capital; company spends $500 million a year buying
back its stock...
Makes me wonder: What is the market seeing that I don't? Is this just herd
mentality - or is it something deeper?
Finally, there's this: Transit Neptune is forming a grand trine with PD’s
natal Uranus and Pluto through most of 1998 - Neptune, Uranus, and Pluto
grand trine will again be in orb in the Fall... to quote astrology 101
courtesy Norman Winski...
Like I said, an interesting juncture.
Regards
Gitanshu
Attachment Converted: "c:\eudora\attach\PD=HG 6-10-98.gif"
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