Stocks of Natural Resources Firms Expected to Stay Strong

By Luxenberg, Stan | THE JOURNAL RECORD, April 13, 1989 | Go to article overview

Stocks of Natural Resources Firms Expected to Stay Strong


Luxenberg, Stan, THE JOURNAL RECORD


The stocks of natural resources companies have outperformed the market this year.

And with the prices of such commodities as oil, copper and aluminum expected to remain strong for at least a few months, many analysts expect the stocks to continue to do well - even if a recession occurs later this year.

Aided especially by the rising prices of oil stocks, mutual funds that specialize in natural resources stocks produced a total average return (the change in net asset value plus reinvested dividends and capital gains) of 8.6 percent for the year through March 23, according to Lipper Analytical Services Inc.

By comparison, the Standard & Poor's 500-stock index had a 7.1 percent return. For the five years through 1988, the funds had a total return of 50.2 percent, less than half the return of the Standard & Poor's 500 index.

Bullish on the sector, many mutual funds that invest a large amount but not necessarily all of their money in natural resources stocks have recently been buying such shares.

For example, the T. Rowe Price New Era Fund has increased the portion of its holdings in such stocks to 75 percent of its portfolio, the highest level since 1981.

The portion was 66 percent a year ago and had been as low as 48 percent in recent years.

``A lot of these industries are going to be rewarded for the changes they made after the hard times they went through,'' said James A.C. Kenned, vice president of T. Rowe Price.

Last year, the earnings of aluminum, nickel and copper producers rose sharply, and analysts expect their earnings to remain strong this year, even if the overall economy softens.

Many producers are operating at full capacity, and ``it will be at least 1991 or 1992 before a significant amount of new capacity can be ready,'' said Peter Anker, an analyst at the First Boston Corp.

Anker recommends buying the shares of the Aluminum Company of America. He predicts Alcoa will earn $11 a share this year, up from last year's $9.74, and he expects its stock price to rise 20 percent from its recent price of $59.50 on the New York Stock Exchange.

Anker also likes the stock of the Phelps Dodge Corp., the copper producer. With production disrupted in Chile and Peru, the metal's prices have been strong.

He believes Phelps Dodge will earn $14 a share this year, up from $13.15 in 1988, and he expects its stock to reach the mid-$60s in the next year. It was trading last week at nearly 57 on the New York Stock Exchange.

Supplies of nickel are particularly tight. J. Clarence Morrison, an analyst at Dean Witter Reynolds Inc., estimates that consumption of nickel will exceed production this year and inventories will fall to their lowest levels in more than a decade.

Morrison recommends buying the shares of Inco Ltd., the Canadian nickel producer whose shares trade on the New York Stock Exchange.

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