Shares of Freeport-McMoRan(NYSE: FCX) have been in a general upward trend since early 2020. That rise coincided with a rise in the price of copper. This is exactly the dynamic that investors need to consider as they weigh the buy, sell, or hold decision around Freeport-McMoRan, one of the world's largest copper miners. Let's explore which of these three options might work best for you.
Reasons to buy Freeport-McMoRan stock
Copper isn't a precious metal, like gold and silver. It is an industrial metal with all sorts of uses thanks to its ability to conduct electricity, its resistance to corrosion, and its thermal conductivity characteristics. Being malleable helps, too, since it can be relatively easily shaped and bent without breaking.
There's also the issue of cost, since gold also conducts electricity and is malleable but is drastically more expensive. All in, the attributes of copper make it vital to the world's increasing use of electricity to power just about everything, including cars and even airplanes.
Image source: Getty Images.
While Tesla is a household name in the electric vehicle space, Archer Aviation is fairly close to getting approval to mass-produce battery-powered air taxis.
And don't forget: All of the power that is being used has to come from somewhere. Increasingly the source of choice is renewable energy like solar and wind power. Those industries are huge consumers of copper, as well. NextEra Energy, for example, is planning on roughly doubling its solar and wind capacity over the next few years.
The main reason to buy Freeport-McMoRan is that you expect it to continue to benefit from the increasing demand for this vital industrial metal. To underscore the potential, copper's price has more than doubled since its lowest point in 2020.
Chairman Richard Adkerson and CEO Kathleen Quirk summed it up in a joint statement accompanying second-quarter earnings: "The long-term outlook for copper is supported by copper's increasingly important role in the global economy and limited available supplies to meet growing demand." If you believe copper prices are headed higher over the long term, it makes complete sense to consider adding Freeport-McMoRan to your portfolio.
Reasons to hold Freeport-McMoRan stock
There's a not-so-subtle problem here, however. Freeport-McMoRan stock hit a low point in March 2020 when copper prices hit a low point. But the metal, as noted, has more than doubled in price since, and the company's stock has gained more than 750% with it.
In other words, a lot of good news has been priced into Freeport-McMoRan's stock price. If you have enjoyed that upturn, or even just a part of it, you could be sitting on material gains.
You need to believe in the long-term story that supply constraints will continue to push the commodity's price even higher as demand continues to rise. If you don't, well, holding the miner's shares could be a mistake and leave you with sleepless nights.
That said, one notable aspect of the stock that might keep some investors around is the dividend. The yield is modest at 1.2%, but the payout is structured to reward investors when copper prices are high because it includes a variable component on top of a base payment. So you aren't only relying on price appreciation to benefit from copper price increases.
Given the 1.2% yield, this isn't the most important reason to stick around, but the variable dividend is an elegant way to ensure that shareholders benefit directly from higher copper prices.
Reasons to sell Freeport-McMoRan stock
There's a caveat to the glass-half-full take on copper. It is still a commodity, and commodities are prone to dramatic and swift price changes. Supply-and-demand dynamics or even exogenous events, like a mine closure or government intervention in a mine's operations, could change investor perceptions enough to lead to material price changes in the copper market.
Right now, sentiment seems to favor higher prices as the most likely outlook. But that could change, considering the very large increase in copper's price in recent years.
If copper prices should cool off, Freeport-McMoRan's shares will probably fall. Thus, investors sitting on very large gains might want to lock in some profits. But if you have owned the stock since the low point, you could just cash out what you originally put into the trade and still have a large position. That way, you are basically playing with house money.
There will be tax consequences to selling to lock in profits, of course, but it wouldn't be a bad idea if you are worried that the next big move for copper and Freeport-McMoRan could be to the downside.
And if you are really worried about the downside risk after such a large upward price move, or if the inherent volatility of commodity prices keeps you up at night, you might even consider selling your entire position. Indeed, if you bet on Freeport-McMoRan and won big, it wouldn't be a terrible thing if you decided to move on. And if you don't buy the big-picture copper story, then you almost certainly shouldn't start a position in this copper miner today.
Freeport-McMoRan is well-positioned, but it's still a commodity-driven stock
As you consider Freeport-McMoRan, it is important to think about the core of the business: copper mining. It's not a bad business, but there's no way around the fact that the price of copper will determine the direction of its top and bottom lines. And that, in turn, will determine the direction of the share price.
In other words, you have to believe in the copper story to believe in the Freeport-McMoRan story. If you don't, you should either sell it or just not buy it. But if you do believe that the importance of copper will lead to ever-higher prices, then buying and/or holding this miner makes complete sense.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy and Tesla. The Motley Fool has a disclosure policy.
