Tiptoeing Back Into Commodities Boom

One of the strongest of these themes is the global commodities supercycle. Now that global mining stocks are trading below their 12-month highs, it’s a good time to stand back and reassess the danger and pick out potential winners as the latest financial storm blows over. We’ve played this theme several times before — most recently with Brazilian mining giant, Companhia Vale do Rio Doce (RIO). This week’s Global Bull Market Alert focuses on Australian mining giant, BHP Billiton Ltd. (BHP). Here’s why I expect BHP Billiton to perform particularly strongly as we move closer to the traditional Q4 rally.

First, BHP’s retiring CEO Chip Goodyear seems to agree with our "baby out with the bathwater" assessment of global markets. As he put it during BHP’s earnings call last week: "We do find it curious that when subprime markets and private equity debt seem to go into a meltdown, our industry underperforms financial services stocks in the U.S. and Europe." He added, "There are a lot of strange things going on, the timeframe for investors has shrunk to nanoseconds."

He also reassured investors that the recent financial market turbulence would not hurt BHP’s growth — and that commodity prices would remain strong for some time. BHP recently had conducted a survey of its major customers around the world to see if their demand for commodities would be dented by the fallout from the U.S. subprime mortgage crisis. The results? The United States was slowing down, "as it has been for the last year," but in developing economies such as China and India "it’s essentially business as usual." With more than 90% of China’s growth coming from its booming domestic economy, the impact of any slowing of exports to the United States would be limited. The bottom line? There was no "fundamental meltdown in our resources business."

Second, BHP’s recent financial results underscore this bullish outlook. Underlying profit, excluding exceptional items, shot up to $13.68 billion to reach the higher end of market forecasts and rise from $10.15 billion. Revenue for the year climbed 21% to $47.47 billion. Earnings from the stainless steel materials division soared a whopping 310% on the back of a spike in nickel prices.

In fact, BHP has made so much money in the past few years that it has struggled to spend it. It has returned more than $26 billion to shareholders in dividends and other capital initiatives since 2001 and is half way through its $13 billion share buy-back program. It also announced it would raise its final dividend by 46% to 27 cents a share.

Finally, the steep fall in BHP’s share price since the first week in July, in line with the rest of the mining sector, means that the stock is still well off its highs. With the benefit of 20/20 hindsight, BHP’s current price will look like a terrific entry point.

So let’s buy BHP at market today and place our stop at $43.80. For even bigger upside, let’s buy the February $60 calls (BHPBL.X.)

PORTFOLIO UPDATE

Both POSCO (PKX) and Potash (POT) bounced back strongly — about 12% — during this past week. The POSCO options we recommended two weeks ago are now up a solid 16%. Look for a new option recommendation in Potash during the coming weeks, as well. I expect that our small cap positions — in Telvent (TLVT) and Central European Distributors (CEDC) — will recover strongly as market sentiment improves.

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