David Sterman

The first law of economics is the lone rule when it comes to commodity prices and commodity stocks. Surplus creates price drops and shortages spur price increases.

For copper miners, one side of the equation is about to sharply change. Though demand remains weaker than normal in the face of a global economy, supply is tightening.

The coming shift from oversupply  of copper to undersupply helps explain why shares of Freeport-McMoran (NYSE: FCX) rallied more than $1 on Thursday, July 19, even as the company reported second-quarter results that were far below year-ago results. Investors are appropriately looking ahead, focusing on what this company's quarterly results could look like a year from now.

For a recap of why I think this stock is quite undervalued, please click here.

As I wrote back in April, "the supply and demand picture enables this company to generate decent profits when the global economy is under pressure and copper demand cools, and really solid profits when demand is at a more normal state."

In the second quarter, Freeport-McMoran earned $0.80 a share, roughly half of what the company earned a year ago. Annualize the current profits, and Freeport would make around $3 a share this year, meaning shares trade for a reasonable 11-12 times depressed earnings. (That EPS figure is after one-time charges, so Freeport actually topped the consensus if you back that out).

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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