Major US Metals Stocks Already Look Overvalued Before Their Recovery?

Commodities & Metals

Published: October 14, 2020 9:37 am

It’s no surprise that companies tied to steel, iron and copper would do poorly in a recession. The recession of 2020 has been driven solely by COVID-19 and has been a downturn like no other in memory. Trillions of dollars were thrown at the problem by central banks, much faster than in prior recessions. All this has helped the major metals companies see massive recoveries in their stock prices ahead of and in anticipation of a return to some normality in the coming quarters.

There may be one other issue to consider that is also unique: most of the major U.S. metals stocks already may be grossly overvalued.

24/7 Wall St. has reviewed the major stocks with their primary operations tied to metals, and many of the stocks have recovered so much from the panic-selling lows in March that many of the top players are trading handily above their Refinitiv consensus analyst price targets. A look at the major U.S.-based leaders in metals reveals that the majority of these stocks are above their fair value targets.

Cleveland Cliffs Inc. (NYSE: CLF) opened 2020 at $8.03 per share and closed Tuesday at $7.28, implying a potential upside to the year-to-date high of about 10%. Shares have a consensus price target of $6.14, indicating that they are already overvalued. The only recent change in analyst sentiment is a price target hike at Credit Suisse from $4.75 to $5.25 with a Neutral rating. The five-year high is $12.66 a share. The company also is getting into the steelmaking business.

Nucor Corp. (NYSE: NUE), like Cleveland Cliffs, posted its year-to-date high in early January at around $55, about 15% below its five-year high of around $64. The stock closed at $48.67 on Tuesday. The consensus price target on the stock is $47.67, but since mid-September, three analyst firms have lifted their price targets to $48, $46 and $50 but maintained their Hold ratings. UBS lifted its price target earlier this month to $48 a share.

Reliance Steel & Aluminum Co. (NYSE: RS) started 2020 with a share price of nearly $120, a five-year high, and closed at $112.15 on Tuesday. The consensus price target on the stock is $107.40, and the most recent analyst call came in August, when Deutsche Bank lifted the stock’s rating from Hold to Buy and set a price target of $115.

Southern Copper Corp. (NYSE: SCCO) posted a five-year high of $52 a share in April of 2018 and started 2020 at just over $42 a share. With a consensus price target of $39.92, Tuesday’s closing price of $47.39 is considerably higher than where analysts think it should be. In August, Morgan Stanley downgraded the shares to Underweight and set a price target of $38. That seems about right.

Steel Dynamics Inc. (NYSE: STLD) opened 2020 at around $33.50, before plunging to around $15 in March. The five-year high share price is around $48. Shares closed Tuesday at $32.71, above the consensus 12-month price target of $31.60. Since late July, three analyst firms have set price targets between $28 and $32, and CFRA boosted its rating from Hold to Buy. BMO Capital Markets rates the stock at Market Perform and lifted its price target in September to $32 a share.

Alcoa Corp. (NYSE: AA) shares started the year at around $22 a share, well below its post-breakup high of around $60 in April 2018. The stock closed at $12.72 on Tuesday, leaving a potential implied gain of about 12.6% to the consensus price target of $14.32. Five analysts firms have weighed in on Alcoa since early September, two upgrading the stock from Neutral to Buy and four raising price targets to between $14 and $18. BofA raised its rating from Neutral to Buy and put a price target of $17 on the stock.

Arconic Corp. (NYSE: ARNC) separated from its aerospace business in April and began trading at around $7.00 a share. The stock closed at $21.92 on Tuesday, against a price target of $31, implying a potential upside of more than 41%. Since early September, three analyst firms have rated the stock the equivalent of Buy with price targets in a range of $27 to $32 a share. Deutsche Bank initiated coverage with a Buy rating and price target of $32.

Freeport-McMoRan Inc. (NYSE: FCX) began 2020 with a share price of around $13, about a third below its five-year high near $20. Shares closed at $16.82 on Tuesday, implying a potential upside of 7% based on a consensus price target of $18. Four analysts have upgraded their ratings or boosted their price targets since late September and one, Citigroup, downgraded the stock from Buy to Neutral. Jeffries raised its target to $24 and reiterated a Buy rating.

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