When the market gives you favorable price action, you should take care to figure out why certain stocks – or sectors – behave the way they do. In today's economic environment, you will find plenty of reasons why the SPDR S&P Metals & Mining ETF (NYSEARCA: XME) has sent mining and metal stocks on a 13% rally in the past two quarters.
Most investors are stuck in the technology stock mania. This has them chasing the ever-higher ceilings in names like NVIDIA (NASDAQ: NVDA) and other semiconductor names. You can stand out from the crowd and consider some of the best fundamental stories in the market today. One of these stories is precious metals stocks, which are causing Wall Street analysts to give them double-digit upside in the coming months.
Several new developments in the U.S. economy are creating a lot of excitement around names like Wheaton Precious Metals (NYSE: WPM), Uranium Energy (NYSE: UEC), and MP Materials (NYSE: MP). As part of a broader construction industry play with a healthy mix of energy trends, you, too, can build a portfolio set to outperform this coming cycle.
Ride the Wave
When professional traders and investors look for places worthy of their investment capital, they often use a process called "top-down" analysis. Here is a quick summary of this process that you can use to justify your potential investment.
Following the past few months of ISM manufacturing PMI data, you can see that the primary metals industry is beginning to heat up significantly. As a three-month reference, the primary metals industry has pumped out three consecutive months of expansion readings.
More than that, these readings suggest an accelerating trend in the industry. Because minerals and metals make up more than a third of U.S. exports, these PMI readings could be just the beginning of an even bigger trend.
Export orders expanded by 6.4% in February, making them the main driver of economic expansion in the month. Considering that a significant share of these export orders will come from metals, it makes sense that new orders are "getting stronger with each passing day and week." according to the respondent section in the PMI report.
Analysts at The Goldman Sachs Group Inc. (NYSE: GS) predicted this could happen. Their 2024 macro outlook report set the expectation for a breakout in the manufacturing sector. Now that foreign customers are sending in their orders for exports, these basic materials stocks will take the lead in raking in profits.
Knowing this, you could blindly pick any metal stock and probably come out winning. But you are here to get the best. By drilling down further, you can find out why these three stocks can be your best pick.
Ready, Aim, Click
Increased manufacturing activity means a similar boom in oil demand will likely follow. This could be why Goldman also projects a price range of $70 to $100 per barrel this year. More expensive oil could make stocks like Uranium Energy more attractive as investors seek alternative energy sources like nuclear (dependent on uranium).
It should be no surprise that analysts see a nearly 40% upside from today's prices by assigning a $8.8 price target for Uranium Energy. More than that, American International Group (NYSE: AIG) has upped its stake in the stock by 2.4% this month alone.
Now that the Federal Reserve (the Fed) is looking to cut interest rates this year, priced in for May according to the FedWatch tool at the CME Group Inc. (NASDAQ: CME), a lower dollar could attract investors into other precious metals like gold and silver.
Traders priced in this future potential by recently bringing gold prices to all-time highs. For this reason, analysts are projecting 87% growth in earnings per share (EPS) for MP Materials in the next twelve months, coupled with a $27.3 a share price target suggesting an 80% upside from today.
Last but not least, you have Wheaton Precious Metals riding on the same metals tailwind. By attracting a lot of attention on the rise of gold, this $20 billion behemoth is set to grow its EPS by as much as 12.5% in the next twelve months, an impressive feat for a company this size.
With a $52.7 price target today, Wall Street analysts expect the stock to rally 18% from its current position. While it shows less upside than MP Materials, remember that MP is only a $3 billion company. Small-capitalization stocks typically offer a more aggressive upside but also added volatility.
