When companies operate in a commodity-dependent industry, such as construction and energy stocks, their stock price swings are a little wilder and cyclical as their underlying products come in and out of demand. Today, the comeback in precious metals, driven by hopeful speculation from the Federal Reserve's proposed interest rate cuts, could bring mining stocks back into their groove.
The focus for investors is the most commonly watched – and traded – precious metals in the market: gold and silver. Because the price of these commodities has seen a sudden rally in the past couple of quarters, there are reasons to believe that certain stocks exposed to these metals are set to go on a newfound bull run, fueled by willing investors and Wall Street analysts.
Stick around and find out why names like Hecla Mining (NYSE: HL), MP Materials (NYSE: MP), and even Pan American Silver (NYSE: PAAS) are on top of the list as the companies that could see double and even triple-digit jumps in earnings per share. Of course, you must understand why looking into the sector is the attractive play today, so here is why.
Behind the Scenes
Where exactly is the commodity landscape today? You can hop over to the Bloomberg Commodity Index to get a good idea. According to this chart, the index sits at a fresh 52-week low price, meaning that commodities are relatively inactive when it comes to investor and trader interest today.
However, not every commodity is made equal since some inside this index are primarily responsible for the decline while others are starting to break out aggressively. Which is which?
Oil prices have had a rough time breaking past the $75 to $80 a barrel range, which is a shadow of the nearly $120 a barrel price reached in 2022. By declining as much as 37% over the cycle, oil can be blamed for some of the underperformance this commodity index has shown.
Checking the Energy Select Sector SPDR Fund (NYSEARCA: XLE), you will note that it has also underperformed the broader S&P 500 by roughly 27% in the past twelve months; checks out that this is the lagger in the industry, so how about metals?
By comparing the six-month performance between the energy sector and the SPDR S&P Metals & Mining ETF (NYSEARCA: XME), you will see that mining stocks outperformed energy by as much as 11% during this period, which is a testament to how optimistic markets have turned surrounding miners on a precious metal price boom.
So, while the overall commodity index is down for the year on the past capital cycle, you now know that precious metals are starting to turn ahead of the cycle to outperform the other major energy commodities. Here's how you can ride this wave.
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From October 2023 to today, gold has gone from roughly $1,650 an ounce to as high as $2,080; that's a 26% bump in two quarters alone! Silver has a story that rhymes over the same period, as it went from approximately $21 an ounce to $23 for a nearly 10% rise.
Wall Street analysts think this is only the beginning; how can you be sure? Check out the earnings per share projections for the mining stocks on this list. Hecla analysts see EPS growth of 700%, which may sound crazy until you find out that most of the revenue in this company comes from silver.
Because silver rallied by less than half of what gold did, analysts are betting that Hecla will advance by as much as 74% from today as they set a $6.5 price target. This is all because of silver's need to catch up to gold as they are sister commodities.
For MP Materials, which derives its business from mining rare earth oxides like neodymium-praseodymium that enable renewable power generation and electric mobility for electrical vehicles (EVs), analysts see the writing on the wall for the coming low interest rate cycle to bring back demand for these industries.
This is why they see EPS growth of 114% for the next year and a 74% upside in their $26.8 a share price target; now that is something to get excited about.
Last but not least, here is what Pan American Silver can offer. With most of its operations focused on silver, this is another direct play that you can consider with the thought of silver catching up to gold in the coming months. Analysts expect EPS to advance by 262% in the coming year, accompanied by a $20.40 a share price target, implying a 58% upside.
While these metals themselves may go up by 10-20% over the coming cycle, knowing what you know now, you can better enhance your performance from the bottoming of precious metals prices.
