If you were expecting a calm start to 2021, you might be disappointed.
We’ve already had a drama-fueled special election that flipped the Senate from Republican to Democratic control, and an angry mob stormed the capitol building. And we’ve barely cleared the first week!
While it looks chaotic, there are already a few investment themes taking form. With a single party now in control of both houses of Congress and the White House, we have a window of two years in which the government should be less gridlocked.
We won’t know the longer-term impact for years. But over the short-term — and let’s face it, the market’s attention span is notoriously short — a less hamstrung government is prone to spend more. So, if you have a decent idea of where that spending might go, you can invest in front of it.
One of President-elect Joe Biden’s themes is to “build back better.” In plain English, that means we’ll be throwing a lot of money at infrastructure spending. That’s bullish for basic materials stocks.
And this brings me to Vale SA (NYSE: VALE), the Brazilian miner. Vale is one of the largest producers of iron ore in the world. It’s also a major producer of other base metals, precious metals and coal.
Vale stock had a rough decade leading up to 2020. It was in free fall for much of 2010 to 2015. It started to rally but then rolled over and died again in 2018, continuing to drift lower.
Vale had the classic problem of being a nice house in a bad neighborhood. Resource stocks have done poorly since the 2008 crisis, and so have most emerging markets. Vale is both a resource stock and an emerging market stock. It never stood a chance.
But something changed in 2020. Emerging markets finally bottomed out. And with almost every country in the world resorting to extraordinary monetary policy, inflation hedges started performing again. Vale stock has nearly tripled off of its 52-week lows.
Will Vale stock’s run continue? Let’s see what our Green Zone Ratings system has to say.
Vale Stock Rating
Vale stock’s overall rating of 79 is “bullish” in our scale and just a hair’s breadth away from “strong bullish.”
A bullish Green Zone stock is expected to outperform the market by two times over the following year based on Adam O’Dell’s historical testing. Strong bullish stocks are expected to outperform by three times. So, if history is a guide here, this is only the beginning of Vale’s outperformance. Let’s dig a little deeper.
Momentum — Vale rates highest on momentum with a rating of 87. That’s not surprising given the stock’s performance through 2020 and into this year. The essence of momentum investing is buying high and selling higher. And if I’m right about the market shift to more inflationary assets, I think that’s very likely here.
Value — Here’s where it gets fun. It’s rare to see stocks that rate well on momentum and value. Generally, if the stock has momentum, it’s not cheap. Vale rates at a 78 here, meaning that it is cheaper than all but 21% of the stocks in our universe. Not bad!
Quality — Vale also rates well based on quality, scoring a 78. Finding a stock that rates well in the trifecta of value, momentum and quality … well, that’s unicorn territory. Our quality rating is based around debt management and profitability. So, Vale is a profitable company that manages its balance sheet responsibly.
Volatility — I’ll admit I was surprised that Vale rated as high as it did in volatility at 75. (Remember, a high score here means less volatility.) Materials stocks are notoriously volatile because commodity prices themselves are notoriously volatile. Vale’s high score here is a nice bonus.
Growth — Vale rates in the middle of the pack in terms of growth at 59. As I said earlier, it’s been a tough decade for the materials sector. But, if we are entering a sustained period of infrastructure investment, I could see Vale’s growth perk up over the next several months.
Size — Alas, you can’t win ‘em all. Vale is a large company with a market capitalization of $97 billion, so it rates low on our size scale at a 2.
Bottom line: It’s still early, and a lot can happen this year. But I think 2021 is shaping up to be a great year for materials stocks like Vale.
To safe profits,
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.