My trade pairs – Long VALE and Short SCCO – Low Calorie Diets Tips

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Inflation is an economic challenge because it undermines the purchasing power of money and can become a vicious cycle in which rising input prices drive up output prices. Central banks use monetary policy tools to counter inflation, but most do effective on the demand side of the economy. If rising inflation comes from the supply side, the tools of the central bank and monetary authorities may be ineffective.

In the wake of the global pandemic, unprecedented central bank liquidity and the tidal wave of government stimulus plans in 2020 have planted seeds of inflation. They sprouted in the second half of this year and bloomed in 2021. In 2022, inflation spread like wildfire. US energy policy change added bullish fuel to commodity prices. It returned crude oil pricing power to the international oil cartel, with production and pricing policies now set in Riyadh, Saudi Arabia, and Moscow, Russia. US government support for renewable and alternative fuels, which are stifling traditional energy production, pushed fossil fuel prices higher in 2021. The War in Ukraine, China and Russia “no limits“The support and continued shortages in the supply chain have fueled the inflationary fire. Tightening monetary policy may not be sufficient to contain inflation in the current environment as the issue is geopolitical rather than economic.

Shifting US and global energy policies have increased demand for the metals and minerals needed for electric vehicles, wind turbines, solar panels and other green energy initiatives when inflation puts pressure on most commodities. Commodity prices are rising in an inflationary environment, and we’ve seen many commodities rally to multi-year and all-time highs in 2022.

Vale S.A. (NYSE:VALE) is a leading diversified commodity producing company, while Southern Copper Corporation (NYSE:SCCO) produces copper and other metals and minerals. I believe the current environment favors VALE over SCCO and recommend a pair trade that is long VALE and short SCCO.

I’m bullish on metals and minerals for at least three reasons

While metals and minerals prices have declined on the back of rising interest rates and a strong US dollar, I remain bullish on the sector as at least three factors point to higher prices over the coming months and years:

  • Tackling climate change will increase demand for metals and minerals essential for decarbonization.
  • China will continue to be the leading consumer. While the COVID-19 lockdowns have weighed on Chinese demand, it should storm again going forward.
  • Supply will struggle to keep up with global demands. It takes years, if not decades, to get new productions online, which will result in deficits that push prices up.

Meanwhile, inflation increases all production costs, pushing prices up. In addition, geopolitical divisions and tensions are increasing military spending, leading to an increase in metal demand. Additionally, the rebuilding of US infrastructure will increase the demand side of the equation for many metals and minerals in the years to come.

VALE is a Brazilian mining company and a leading global producer

Vale is a Brazilian multinational materials company. The company profile says:

company profile

Company Profile – VALE (Seeking Alpha)

On June 14, 2022, just below the $16 per share level, Vale’s market cap was $80.35 billion. Shares trade an average of over 31 million each day. The dividend of $1.45 per share represents a 9.12% yield.

SCCO is a South and Central American metals producer

Southern Copper is a US-based metals and mining company with operations in South and Central America. SCCO’s company profile states:

company profile

Company Profile – SCCO (Seeking Alpha)

Just above the $57 level on June 14, 2022, SCCO’s market cap was $46.47 billion. The stock trades an average of over 1.26 million each day. The $5.00 dividend equates to a yield of 8.77%.

Both companies are up sharply since the early 2020 lows

Shares of VALE and SCCO have posted impressive gains since March 2020, when they fell to a bottom as the global pandemic gripped markets across asset classes.

Rally in VALE shares

Chart of VALE shares since March 2020 (bar chart)

The chart shows VALE’s surge from $6.49 in March 2020 to the $15.85 level, a gain of 144%. VALE rose to $23.18 per share in June 2021 and hit a lower peak of $21.29 in April 2022.

Rally in SCCO stocks

Chart of SCCO shares since March 2020 (bar chart)

SCCO hit a low of $23.43 in March 2020 and stood at the $57.21 level on June 14, up 144% over the period. SCCO rose to a peak of $83.29 in May 2021 and made a lower peak of $78.18 in March 2022.

The four reasons why I prefer VALE to SCCO and am willing to go long the Brazilian company and short the Peruvian copper miner

Four factors lead me to favor VALE over SCCO in the coming months and years. I believe both companies will benefit from the current inflationary environment, where combating climate change is increasing demand for metals and minerals. VALE could have a lot more potential than SCCO.

In the last four quarters, SCCO has missed consensus estimates on three occasions while reporting earnings in line with expectations for only one quarter.

EPS history

EPS Story – VALE (Looking for Alpha)

Meanwhile, VALE has had a better track record of delivering better than expected EPS.

EPS history

EPS Story – SCCO (Seeking Alpha)

VALE has beaten analyst estimates in three of the last four quarters.

  • Dividends and Quant Ratings

VALE’s yield of 9.12% is slightly higher than SCCO’s dividend of 8.77%. While both commodity producers offer yields far higher than average, VALE’s is higher.

Seeking Alpha’s quant ranking for VALE is 6 out of 274 in the materials sector and SCCO ranks 109 out of 274 in the same sector.

While the rising US dollar weighs on all commodity prices, the Brazilian real is trending higher against the US dollar in 2022.

Uptrend of the real against the dollar

Chart of the Brazilian Real against the US Dollar (Bar Chart)

The chart highlights the pattern of higher lows and higher highs in the Brazilian Real versus the US Dollar currency relationship. A rising real increases earnings for VALE, which is bullish for the stock. Meanwhile, the Brazilian elections in October this year could fuel rising optimism about the future of Brazil’s economy.

Valuation, Growth, Profitability, Momentum and Reversal ratings favor VALE over SCCO.

Factor scores VALE

Factor Grades- VALE SA (Seeking Alpha)

VALE’s grades are above B- in all categories, with A+ ratings in valuation and profitability.

Factor Classes SCCO

Factor Grades – SCCO (Seeking Alpha)

While SCCO gets an A+ for profitability, it gets an Failing grade for growth potential.

Meanwhile, a poll of 21 analysts from Yahoo Finance has an average price target of $21.22 for the stock, with forecasts ranging from $14 to $25. The average target is 33.5% above the current share price of $15.90.

Yahoo Finance’s survey of five analysts has an average target of $63.37 for the shares, with estimates ranging from $47 to $72.50. At the $57.15 level, the average target for SCCO stock is 10.88% above the current price level.

I prefer pair trading, long VALE and short SCCO as the outlook for VALE is far more attractive than SCCO. I’m bullish on the sector and expect both stocks to rise, but the evidence points to far greater upside potential for VALE SA

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