You Could Strike Gold In Metals, Mining, Even Steel -- If You Act Quickly

Few companies are as humdrum as nickel miner Inco Ltd. (N ). Yet its shares zoomed 66% in 2003 as stainless-steel producers in China and other hot economies gobbled up the metal faster than Inco and its peers could dig it out of the ground.

Missed that one? Don't worry. With some well-timed buys, you can make money in the mundane. Mining stocks could climb further as the global economic expansion picks up momentum. Industrial gas producers are just starting to rally. If you're willing to take more of a gamble, commodity chemicals are showing signs of recovering, too, and if you can believe it, even steelmakers could be a good play.

About the only basic materials sector that analysts are shying away from is paper and forest products. Overcapacity in paper production and an expected slowdown in housing starts are leading investors to put the whole group on hold. "Frankly, I think most of my companies are fairly valued today," says paper and forest products analyst Steven P. Chercover of Denver-based D.A. Davidson & Co.

No basic-materials sector did better in 2003 -- or has more fans for 2004 -- than metals and mining. Shares in copper miner Phelps Dodge Corp. (PD ), for instance, doubled in price in the past year, while those of Freeport-McMoRan Copper & Gold Inc. (FCX ) leaped 166%. Nonetheless, global demand for nickel, copper, gold, and other metals is strengthening, while inventories remain lean. Crit Thomas, director of growth equity investment for Armada Funds, which owns 315,000 shares of Freeport, says the stock could almost double to $80 a share in 2004. He's also a bull on Phelps and Inco. "They've got a whole lot of upside yet," says Thomas.

In contrast to the miners, the chemical makers have yet to profit from the economic upturn. Granted, orders are starting to rise. But capacity far outstrips demand in almost every product line, so chemical makers are having a tough time raising prices. Moreover, companies are getting walloped by higher energy and raw material costs.

Some pros are betting that Dow Chemical Co. (DOW ), the nation's No. 1 chemical producer, is a good turnaround play. Dow lost money in 2001 and 2002 as sales shrank. In fact, it couldn't even cover its dividend payout from its cash flow. But now the company appears to be recovering. It has slashed costs -- by laying off 4,000 workers in 2003, among other moves -- and, unlike most of its rivals, has had some success in jacking up prices. Analyst William D. Young of Credit Suisse First Boston (CSR ) predicts Dow's shares will reach $55 within a year, from just under $40 today. The price-earnings ratio, at 21, is high, not unusual for economically sensitive companies at the start of an upturn.

The segment of the chemical industry that's already getting some traction is industrial gases. The share price for Praxair Inc. (PX ) gained 29% in 2003; Air Products & Chemicals Inc. (APD ) moved up 10%. Analyst Donald D. Carson at Merrill Lynch & Co. (MER ) still recommends buying both based on their ability to hike prices to customers who use these gases in various manufacturing processes.

Another gritty sector to check out is steel. Over the last decade, the industry in the U.S. has been so decimated by imports that there are relatively few players left. In fact, one newcomer, International Steel Group Inc. (ISG ) was formed from the assets of three bankrupt steelmakers. With lower labor costs and more operating efficiencies, this producer is starting to look like it has a bright future. The company went public Dec. 12 at $28 a share and closed over $35.

Whatever you do, don't get attached to these stocks. "These are cyclical plays," says Maira F. Thompson, a portfolio manager at Clark Capital Management Group Inc. "You have to take advantage of them while you can." So be ready to sell at the sign of a softening economy.

By Michael Arndt

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