How to Adapt to the Market Environment This Year

The best investors adapt to the current market environment. Like an offensive play-caller, they successfully adjust to what the other side (the market) is doing by targeting the right sectors and executing the proper strategies.

– Zacks

On Wednesday, the U.S. Labor Department released its updated CPI which showed inflation rose 7% in December from a year earlier, the fastest pace since 1982. While this was largely anticipated, the rate of change shows just how significant the rise in prices has become:

Zacks Investment ResearchImage Source: Zacks Investment Research

In this market environment, which investments are likely to outperform?

Consumer demand is still strong and the inflationary pressures that mounted last year are likely to persist in 2022. A few rate hikes from the Fed of 25bp may not be enough to counteract rising costs. While the U.S. consumer is in good shape and the economy can weather slight increases in rates, the damage has already been done.

It seems like everywhere you go people are talking about increased prices. Whether it be food products, oil and gasoline, or input materials, prices have skyrocketed across the board. A short list of commodities shown below are indicative of this situation. Since March 31st in 2020, aluminum has risen 67%, copper has climbed 84%, and coal prices have increased 154%.

Zacks Investment ResearchImage Source: Zacks Investment Research

As a historical hedge against inflation, commodity stocks have been outperforming over the past year and look set to continue that run in the first few months of this year. While investing directly in commodities can be lucrative, decades of market history have shown us that it is far more profitable to own stocks of companies that produce commodities than the commodities they produce. We can even view a more recent example of this, highlighted by the three companies we will be discussing below:

Zacks Investment ResearchImage Source: Zacks Investment Research

The SDPR S&P Metals and Mining ETF XME has soared more than 200% over the same timeframe and is currently withing striking distance of a 52-week high. XME contains all three companies we will analyze. These three firms account for approximately 13.63% of the total SPDR S&P Metals and Mining ETF holdings. While XME has taken a breather in a consolidation pattern for the last several months, the ETF looks poised to continue its outperformance in the short-term.

Zacks Investment ResearchImage Source: Zacks Investment Research

Freeport-McMoRan Inc. (FCX)

Freeport-McMoRan is a leading international mining firm that operates in North America, South America, and Indonesia. FCX primarily explores for copper, gold, molybdenum, silver, as well as oil and gas. Incorporated in 1987 and based out of Phoenix, AZ, Freeport-McMoRan operates approximately 165 wells globally.

FCX is expected to gain from progress in its exploration activities that will boost production capacity. Higher copper prices are also projected to support company margins. FCX is poised to benefit from the international push in electric vehicles, which is positive for copper as EVs are copper-intensive.

FCX has exceeded earnings estimates in nine out of the past ten quarters. Trading at a relatively undervalued 10.77 forward P/E, the stock has vastly outperformed the market since the March ’20 market bottom. FCX most recently reported EPS of $0.89, a +14.1% surprise over consensus. In the past year, FCX stock is up 46.48%.

FreeportMcMoRan Inc. Price, Consensus and EPS Surprise

FreeportMcMoRan Inc. Price, Consensus and EPS Surprise

What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. This more recent information has proven to be very useful in finding positive earnings surprises, giving investors a leg up during earnings season. In fact, when combining a Zacks Rank #3 or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

With a Zacks Rank #3 and a +1.74% Earnings ESP, another earnings beat may be in the cards for FCX when the company reports on January 26th. This will be the final set of 2021 quarterly earnings data. For the year, revenues are projected to have risen 65.09% to $23.44 billion. Analysts are expecting EPS of $3.14, which would translate into 481.48% growth relative to 2020.

Reliance Steel & Aluminum Co. (RS)

Reliance Steel & Aluminum is one of the largest metals service center companies in the United States. RS provides aluminum, alloy, brass, copper, steel, and titanium products to general manufacturing, non-residential construction, transportation, energy, and defense industries. The company operates over 300 metal processing and distribution facilities in 40 states, as well as 13 in other countries. Reliance Steel & Aluminum was founded in 1939 and is headquartered in Los Angeles, CA.

RS, a Zacks #1 Strong Buy, continues to grow through strategic acquisitions and the expansion of existing operations. The company has made 59 acquisitions since its IPO back in 1994. The purchase of Metals USA added about 48 service centers located throughout the U.S., while the buyout of Tubular Steel boosted the firm’s product portfolio and end market diversification. Higher metals prices are expected to drive RS’s performance this year.

Even with the recent run in its share price, RS trades at just an 11.04 forward P/E indicating shares are still relatively undervalued. RS has surpassed earnings estimates in each of the last eleven quarters, most recently reporting a beat of 3.54% in October when the company reported EPS of $6.15. RS stock has advanced over 27% in the past year.

Reliance Steel & Aluminum Co. Price, Consensus and EPS Surprise

Reliance Steel & Aluminum Co. Price, Consensus and EPS Surprise

Analysts covering RS have upped their 2021 EPS estimates by 2.91% over the past 60 days. The Zacks Consensus Estimate now stands at $20.48, translating to growth of 165.63% versus 2020. We’ll see if RS can live up to the high expectations when the firm reports its final ’21 EPS details on February 17th.

Arch Resources, Inc. (ARCH)

Arch Resources produces and sells metallurgical and thermal coal from surface and underground mines. ARCH sells its products to industrial, utility, and steel producers in the U.S, Europe, Asia, Central and South America, and Africa. The company owns or controls over 700,000 acres of coal land domestically and operates seven active mines. ARCH was founded in 1969 and is based in St. Louis, MO.

ARCH is severely undervalued (2.59 forward P/E) and has delivered a trailing four-quarter earnings surprise of 10.98%. The company most recently reported EPS in October of $4.92, a 3.8% surprise over consensus. ARCH stock has climbed nearly 88% in the past year.

Arch Resources Inc. Price, Consensus and EPS Surprise

Arch Resources Inc. Price, Consensus and EPS Surprise

EPS projections look favorable, with the Zacks Consensus Estimate predicting growth of 178.8% to $17.92 in 2021. Looking into this year, analysts are anticipating further EPS growth of 109.29% to $37.50. We’ll see how the ’21 EPS consensus matches up when the firm reports its final quarterly slate on February 8th.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
FreeportMcMoRan Inc. (FCX): Free Stock Analysis Report
 
Reliance Steel & Aluminum Co. (RS): Free Stock Analysis Report
 
SPDR S&P Metals & Mining ETF (XME): ETF Research Reports
 
Arch Resources Inc. (ARCH): Free Stock Analysis Report
 
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