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Iron Stock Steels Itself for a Rebound

March 16, 2005

By John Dobosz
Forbes.com

Tobin Smith, editor of ChangeWave Investing, recommends Brazil-based Companhia Vale Do Rio Doce, the third-largest mining company in the world and one of the world's largest producers of iron ore. RIO competes against other mining outfits like BHP Billiton and Rio Tinto.

One of the ingredients necessary for making steel, iron ore has been in heavy demand around the world and has given Vale Do Rio Doce (nyse: RIO - news - people ) exceptional pricing power with its customers. After raising prices 18.6% in 2004, Vale Do Rio Doce announced last week that it has signed deals with two Italian smelters to provide iron ore at prices 71.5% higher than last year's.

Earnings for 2004 come out on March 21, but for the first nine months of 2004, revenue was up 55% to $5.75 billion, while net income grew 44% to $1.85 billion. Vale Do Rio Doce shares are up nearly 90% in the past year, but down more than 10% from a 52-week high of $36.61 hit on March 7. Vale Do Rio Doce trades for 14 times expected 2004 earnings, but just under eight times the consensus forecast for 2005 earnings per share.

In an otherwise flat stock market, Smith says, the best opportunities are in energy and raw materials. Growing demand from China and India, as well as renewed economic vigor in the U.S. and Europe, are helping to drive prices of industrial inputs like oil and steel substantially higher.

Smith is also a big fan of Vale Do Rio Doce's $1.28 per share annual dividend (4% yield), which he says should double in the next year as the company triples its cash flow.

Smith says it's OK to "nibble" at current prices, but says to "back up the truck" just above $30 per share at Vale Do Rio Doce's 50-day moving average of $30.69. He believes the double-top formed in the company's chart over the past two weeks will shake out weak hands and provide an excellent buying opportunity for a ride up to $38 per share.