The materials sector, which encompasses companies producing raw materials and basic resources, has recently been on a rollercoaster ride. While the sector benefited from the post-pandemic economic recovery and increased demand for commodities, the tides have started to turn for these materials stocks to sell.
As we traverse through May, several warning signs are flashing red for materials stocks. Firstly, interest rates have reached record highs, with the Federal Reserve not backing down on lowering rates for the short term. This has increased borrowing costs for companies, putting pressure on their profit margins and making it more expensive to fund expansion projects.
Also, the U.S. economy slowed sharply in the first quarter of 2024, with the gross domestic product (GDP) growing at an annual rate of 1.6%. This deceleration from the 3.4% growth rate in the previous quarter was attributed to factors such as a surge in imports, which reduced growth by nearly one percentage point, and businesses reducing their inventories.
This puts a negative backdrop in place for these materials stocks to sell, which are also struggling with their poor fundamentals.
So here are three materials stocks for investors to consider selling in May.
Freeport-McMoRan (FCX)
Freeport-McMoRan (NYSE:FCX) faces challenges from a constrained copper supply, which might not keep up with demand, potentially affecting stock performance.
However, despite this, FCX reported strong financial results for the fourth quarter of 2023, showing a total revenue of $7.1 billion, an increase from $6.2 billion in the same period the previous year. The company’s net income for Q4 2023 was $1.4 billion, significantly higher than $224 million in Q4 2022. Higher copper prices and increased sales volumes primarily drove the substantial rise in net income.
But copper prices recently topped $10,000 per ton for the second time in a fortnight, and analysts like Goldman Sachs are forecasting much higher prices in the coming years, projecting copper could reach $12,000/tonne by the end of 2024 and $15,000/tonne in 2025.
As counterintuitive as it sounds for FCX, as copper supplies tighten, the costs of mining and producing copper rise. Mining companies must spend more on exploration, development, labor, energy and other inputs and squeezing margins. FCX’s free cash flow margin is just 5% at the time of writing, and with expensive CAPEX projects on the horizon, this could turn negative quickly.
Alcoa (AA)
Alcoa (NYSE:AA) is somewhat in the opposite position in FCX. While copper is red hot with demand, aluminum is falling far behind.
Some consumers are seeing higher premium quotes for Q2-Q4 2024 deliveries, in the range of 19-22 cents/lb, driven by futures pricing strength. However, despite some optimism, consumers remain cautious about inventory levels and are working to reduce excess inventory carried over from 2023.
Meanwhile, AA reported its financial results for the first quarter of 2024, indicating a challenging period with a net loss of $252 million, an increase from a $231 million loss in the same quarter of the previous year. The revenue was reported at approximately $2.6 billion, roughly stable compared to the previous year’s corresponding quarter.
For the second quarter of 2024, the company expects unfavorable financial impacts due to increased seasonal maintenance and mining costs in its Australian operations.
If the market continues to be mediocre, it could be serious news for AA, which has reported a negative free cash flow of $500 million over the last twelve months.
Wheaton Precious Metals (WPM)
Wheaton Precious Metals (NYSE:WPM) is a sell due to the cobalt market experiencing significant oversupply and thin demand, adversely affecting producers in this sector. WPM is one of the leading cobalt producers, so it should be treated cautiously.
Fastmarkets’ price assessment for cobalt was 99.8%. Cobalt metal ex-works in China was 190,000-230,000 yuan/tonne on May 8th, the lowest level since August 2016. The price decline is attributed to a surge in China’s domestic cobalt metal production capacity, far exceeding current demand.
Market participants expect the oversupply and bearish conditions to persist, as consumer demand cannot keep up with the surging cobalt metal production.
Looking into China’s materials market is often a barometer for the rest of the world, given that it’s one of the world’s largest importers (and exporters) of materials to and from other countries. I, therefore, have a bearish stance on WPM specifically.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
