It was a rough day for all stocks, but the basic materials stocks were hit particularly hard in Tuesday marketwide 2.3% implosion. The iShares Dow Jones US Basic Materials Fund (NYSE:IYM) was off 3.2%, led by AK Steel Holding Co. (NYSE:AKS) and Stillwater Mining Co. (NYSE:SWC). Those stocks were lower by 8.2% and 8.8%, respectively, though they were hardly the only equities in the group to lose ground.
Stillwater Mining
In the case of Stillwater, the pullback was not prompted by any specific bad news. Indeed, expectations are high of 2010 and 2011, but those expectations are plausible. The palladium and platinum miner is expected to earn $0.83 per hare in 2010, and $1.43 per share in 2011... a stark contrast to the nice cents lost per share in 2009.
Rather, Stillwater Mining Co. shares most likely lost ground simple because they're overbought, and now, swimming upstream.
The company has yet to post its first quarter results; no release time has been announced either. But, given the stronger prices for precious metals (not toe mention its deal with Ford Motors), the forecast of earnings of 11 cents per share for the quarter are not out of reach.
That, however, may not be of much help for the stock in the meantime, particularly now that Tuesday's blow was dealt.
AK Steel Holding Co.
AK Steel Holding Co. shares, on the other hand, were down for a more clear reason... the likely rise in the cost of coal stemming from the Massey mine accident earlier this month. About 1/4 of steel company's coal is supplied by the very mine where the accident occurred. The fact that the company topped earnings estimates last quarter didn't help in the least.
The rationale for the pullback may only be a temporary phenomenon though, not to mention a mere excuse to take (or continue taking) profits rather than a long-standing reason.
The fact that the particular mine was a major supplier for AK Steel was not actually 'news'. Translation? Investors are seeing and hearing what they want to, when they want to. The selling mood may pass as soon as the broad market trend lets AKS out from under its thumb.
Better still, Standard & Poor's upgraded AK Steel Holding Co. on Tuesday, citing an expectation of an increase in demand for steel that should more than offset the increase in the steel company's coal costs.
iShares Dow Jones US Basic Materials Fund: Value Versus Trend
Of course, when the long-term value is fighting the short-term trend, the trend tends to win. Said another way, the weakness in the basic materials along with ETFs like the iShares Dow Jones US Basic Materials Fund could stay in place for a while.
IYM as well as the basic materials indices it mirrors were both rampaging market leader last year (up 40% in 2009, second only to technology). However, the weight of those gains has made the sector less of a leader and more of a laggard with each subsequent bullish move from the market. In fact, the iShares Dow Jones US Basic Materials Fund started out leading the early-February rebound, but has tapered off to mere mediocrity in the meantime. And as of Tuesday, IYM became more of a liability than an asset as investors start to seek what are perceived to be safer havens.
Longer-term though, the looming pullback may prove to be an opportunity, as the increased demand for materials isn't a mere theory. For instance, in the first quarter of 2010, the steel industry capacity (production) utilization increased to 73%, versus 58% in the fourth quarter of 2009, and 45% in the first quarter of 2009.
The slide for materials stocks between here and their eventual bottom, however, may be bigger than most investors can stomach.
Related Reading
James Brumley - As a former stock broker and analyst, turned writer, James Brumley can tell you what most advisors can't - or won't. His belief is that ...
