Even from an early age, I have been a contrarian. Every time the crowd is swimming in one direction, I consistently find myself being pulled by instinct to want to swim the other way. Although this has not always the best inclination on a personal basis, I have found it has enhanced my investing returns over the years. Whenever a company announces an earnings miss, disappointing guidance or has a poorly received acquisition or other strategic move that crushes the stock, I find myself looking at the company's fundamentals to see if investors are overreacting. Frequently, I will start to build a position in the temporarily impaired stock and make good profits over the long term when sentiment eventually changes.
Freeport McMoRan (FCX) is a good example of a company that recently disappointed the market but whose value story remains intact. The company, which is one of the world's largest miners of copper and gold, decided to make two simultaneous acquisitions last week to get in to the energy E&P business. The stock lost 20% of its market capitalization in two days as the market gave its decision to spend $9 billion on these energy firms a loud Bronx cheer. Reasons cited include the company overpaid for the companies, the lack of cost savings and investors are disappointed by the company adding complexity to its business in these uncertain times.
I certainly agree with the consensus that the company probably overpaid for these acquisitions by around a billion dollars or so. I also would have preferred Freeport got some cost savings from these acquisitions. However, is knocking over $6 billion off Freeport's market value justified or is this a classic contrarian buying opportunity? Looking at the value metrics on FCX, I think the stock over corrected especially with the improving sentiment on Chinese economic growth recently.
Four reasons FCX is a long-term bargain at $32 a share
- The stock yields almost 4% (3.9%) which should put a floor under the stock.
- FCX is cheap at less than 7x forward earnings, especially if demand in China is rebounding. This is a significant discount to its five-year average (12.9).
- The stock is selling near the bottom of its five-year valuation range based on P/CF, P/S and P/B. The company has also beaten earnings estimates 11 of the last 12 quarters.
- The stock has good technical support in this price range (see the chart below).
Freeport McMoRan (FCX)