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The Masters of the Universe Are Now "Stupid Cheap"

By Dr. Steve Sjuggerud
Tuesday, July 9, 2013

In late 2011, shares of mining giant Freeport-McMoRan (FCX) lost nearly half their value in just over two months...
 
I couldn't believe it.
 
I grabbed the opportunity. I recommended True Wealth readers buy Freeport a couple weeks after it bottomed.
 
My timing was good... The stock jumped 50%-plus in less than four months.
 
Whenever Masters of the Universe are trading for "stupid cheap" prices, you have to seriously consider buying them... And today, three of them are "stupid cheap" again...
 
I described what a "Master of the Universe" looks like in the November 2011 issue of my True Wealth newsletter...
 
Whoever controls the Grasberg copper mine is a true "Master of the Universe."
 
The Grasberg mine in Indonesia contains the world's largest reserves of copper... AND gold. The value of an irreplaceable asset like this – in a world with an insatiable long-term demand for copper and gold – is priceless.
 
Yet the company that owns Grasberg is so large and powerful, it actually mines more copper per year in North America than it does at Grasberg... and it mines more copper in South America than it does in North America.

Now THAT is a Master of the Universe. That's Freeport.
 
Freeport is big. But Rio Tinto (RIO) and Vale (VALE) are even bigger Masters... They're both more than twice Freeport's size.
 
As I wrote in that same True Wealth issue: "These two companies are Masters of the Universe in iron ore – the raw material in steelmaking. China needs iron ore... All those cars, refrigerators, and skyscrapers aren't going to be built with bamboo!"
 
Today, these three Masters are "stupid cheap" again... with high dividend yields and low price-to-earnings (P/E) ratios:
 
 
Est. P/E*
Est. Dividend*
Freeport (FCX)
7.3
4.6%
Rio Tinto (RIO)
6.5
4.9%
Vale (VALE)
6.0
5.3%
*Numbers based on fiscal year 2014 consensus earnings estimates.
Data source: Bloomberg

Why are they cheap?
 
There are plenty of reasons... Commodity prices have fallen – a lot – because China isn't growing as fast as expected. The companies splurged in the good times and are now paying for it in the bad times. They're taking multibillion-dollar write-downs. There's plenty of supply. In short, everyone hates commodity companies now.
 
The thing is, Freeport still controls Grasberg, and Vale is still a low-cost producer of iron ore.
 
Vale, in particular, is down a lot... Brazil's stock market has lost a quarter of its value (in U.S. dollar terms) in the last two months. Vale – a Brazilian company – was not immune... It lost a quarter of its value in two months as well.
 
I can't (in good conscience) buy these Masters of the Universe yet. The reason is, I don't know where the bottom is... and I've found that predicting the bottom is much harder than simply waiting on a new uptrend.
 
I am interested in buying these stocks soon... They are dirt-cheap. And they are hated now.
 
Importantly, these three companies are Masters of the Universe... They control incredible assets, and they will be around for decades.
 
I will buy them again someday. But I am not buying... yet. I'm waiting for the uptrend.
 
Good investing,
 
Steve




Further Reading:

When Steve sees dirt-cheap assets, he reminds himself of this "life-changing" quote from legendary investor Jim Rogers: "Markets often rise higher than you think is possible... and fall lower than you can possibly imagine." Steve says to never forget it, and "don't ever catch yourself saying 'but it can't fall any more...'" Read his full essay here.
 
"Many traders get a thrill from trying to pick the exact bottom or top of a runaway market," S&A Editor in Chief Brian Hunt says. "They perform the necessary fundamental analysis to realize a market is cheap after a big fall... or expensive after a big rise. Armed with this valuation knowledge, they go for the glory and start buying... and lose a bundle." Learn more in this interview.

Market Notes


WELLS FARGO AND THE HOUSING REBOUND

Yesterday, Wells Fargo (WFC) jumped 2% to reach an all-time high. And that's good for America.
 
For much of the past three years, we've urged readers to invest in U.S. housing. As Steve pointed out many times, the post-crash housing market was very cheap... and sentiment toward the sector was terrible.
 
An excellent "derivative" way to invest in U.S. housing is through the giant bank Wells Fargo. It's America's largest originator of mortgages. It benefits when asset values rise and loans are paid back. It's also a major holding of superinvestor Warren Buffett.
 
As you can see from the chart below, Wells Fargo is a winning idea right now. Shares are up 30% in the past 12 months. And just yesterday, the stock jumped 2% to reach an all-time high. Housing is recovering... and it's pushing Wells Fargo higher and higher.
 

premium teaser

Another dirt-cheap resource opportunity... My favorite way to own gold...
 
This opportunity is even better than buying gold or gold stocks... And when things turn around, our gains could be enormous...
 

In The Daily Crux



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