Wednesday, March 26, 2008
Mining Equipment stocks look good.
So far, 2008 has been a very tough year in the stock market. With the worry of recession in the air, it's hard to find stocks that don't have somewhat of a "yah but" factor. Luckily, there are still some stocks that are benefiting from current global trends that don't have much risk to the downside. One area that fits this description is mining equipment. I have found two stocks in this sector that I really like. I couldn't decide which one I liked best, so I am recommending both Bucyrus International (BUCY) $107.17 and Joy Global (JOYG) $66.21. Both companies are benefiting from higher commodity prices which I expect to remain high. Now, you may ask why I'm just now recommending these companies since commodity prices have been high for quite some time. Well, most of the equipment that these companies make is used in coal mining. After a tough year in 2007, coal prices are up sharply due to severe weather in China and Australia and power outages in South Africa. Both companies should increase earnings by over 30% in 2008 and another 25+% in 2009. I think that kind of growth will be rewarded by the market and that there is little chance of an earnings disappointment from either of these companies.
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4 comments:
Hmmm, interesting. Why do you think coal will continue to be up? Can you predict the severe weather for this summer and winter?
Unfortunately, I didn't have a lot of time to go into great detail on my original post. Basically, there were huge stockpiles of coal in 2007 that hurt pricing. Because of the bad weather this year, those stockpiles have dwindled and prices have trended higher. I believe that coal prices will stay high because a lot of the emerging markets are creating huge demand which is still growing. JOYG and BUCY are a lot like Transocean in that they don't necessarily need the price of coal (oil in the case of Transocean) to keep going higher for them to deliver good earnings growth. They only need the price to stay elevated. That will in turn cause a lot of the mining companies to open new mines or mines that have been idled. Also, keep in mind that coal is used in stell which is also trading at elevated prices and JOYG and BUCY get some revenue from companies that mine things other than coal.
What is "stell"?
Sorry about that. It should be "steel" no "stell". A couple of more comments on why I picked JOYG and BUCY. I considered recommending one of the coal mining companies, but it was very difficult to predict which one would be the most successful. They all have a different mix of products. Some of them mine coking coal which is used to make steel. Some also produce natural gas from their mines. Some of them mine coal which is low in sulphur. Most importantly, some have already locked in prices for all of 2008 and so they aren't going to benefit if coal prices go higher. All of this pointed me to the mining equipment stocks, because I think coal will stay in high demand and I don't have to worry about all the other factors.
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