It's Time to "Follow the Money" Into This Stock

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Before moving into investment research, I spent two decades as a journalist – and once even interviewed former President Richard M. Nixon.

So it's no surprise that one of my favorite movies of all time is the Watergate docudrama "All the President's Men."

And my favorite scene in that flick is the famous "parking garage" meeting, where Washington Post reporter Bob Woodward (Robert Redford) squares off against confidential source "Deep Throat" (Hal Holbrook) in an effort to gauge the depth and breadth of the Nixon administration scandal the newspaper had uncovered.

Deep Throat's response: "Follow the money."

That's doggone good advice – for reporters tracking down a story and for investors seeking the very best profit plays.

With a beaten-down stock in particular, there's nothing more heartening than en masse insider buying – or seeing that substantive investments are being made by the handful of institutional players with a proven ability for finding big winners.

It's even better when you see that the Big Boys are making those investments in stocks the rest of Wall Street wouldn't even think of touching.

This "even better" scenario is precisely what we're right now seeing with Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) – a $33 stock that one of our own experts, Martin Hutchinson, also happens to view as a big-time profit opportunity.

The Phoenix-based Freeport is the world's biggest publicly traded copper company. And it's also one of the best deals you'll find in the natural-resources sector, Martin says.

"Bill, I think FCX a bargain – even without a further run-up in gold/copper prices," Martin told me just the other day. "Precious-metals stocks, in general, are cheap currently – though some are very badly run. Freeport, quite thankfully, doesn't suffer from that bad-management affliction. It's a stock that I continue to like very much."

In fact, Martin recently recommended Freeport to subscribers of his Permanent Wealth Investor and Merchant Banker Alert trading services. And if you look at the massive trading range the stock has experienced over the past several years, you'll see that it's about as cheap as it's been.

It also has a lot of ground to cover in order to revisit its highs of early 2012. The way Martin sees it, that means there's a hefty profit play at hand here.

Freeport was Martin's pick in the December 2011 Private Briefing special report "The Five Stocks You Have to Own in 2012," and zoomed as much as 22% in just five weeks. But after it traded as high as $47, concerns about the European debt crisis and the overall health of the global economy (and especially the United States and China) led to a general sell-off in stocks.

Freeport wasn't spared, and traded into the low $30s (underscoring, yet again, why we're such big advocates of "trailing stops.")

The stock started to recover last fall – and even made it back into the low $40s.

But Freeport investors were stung again in early December when the company announced it had agreed to buy two natural-resource companies in transactions worth an aggregate $20 billion. The stock plunged 16% in a single day, hitting its 52-week low of $30.54.

On the day the stock plunged, Martin exhorted subscribers to wade in and buy. And it has rebounded about 8% from its nadir. But Freeport has failed to participate in the U.S. stock market rally. (Indeed, over the last six months, Freeport shares are down about 7% while the Dow Jones Industrial Average is up 21% – a relative performance differential of nearly 30%.)

And the deals the company announced seem to be the reason why.

In that early December announcement, Freeport said it was buying Plains Exploration & Production Co. (NYSE: PXP) and McMoRan Exploration Co. (NYSE: MMR) in deals that would enable the suitor to return to its energy-based roots. The buyouts would add high-quality U.S. oil-and-gas resources to the company's existing global mining portfolio, and would be accretive to the company's overall operating cash flows, Freeport said at the time.

But pundits savaged the deals, noting that acquisitions tend to destroy shareholder value, not improve it. They said that Freeport was overpaying. And there also seemed to be an underlying angst that a company which had served as a great proxy for copper demand (and, by extension, China's economic health) would no longer be as simple to analyze.

Not everyone agrees with that bearish view, however. Martin doesn't – and I have a lot of faith in his assessments.

Nor does Leon Cooperman, the billionaire investor who runs the $3 billion Omega Advisors hedge fund, which he founded in 1991.

In an early January interview in CNBC, Cooperman said he liked the deal, and thought it would be good for Freeport. Indeed, he said the decline in the company's share price just made the stock more attractive.

The upshot: Regulatory filings show that Omega bought more than 3 million shares of Freeport-McMoRan in the fourth quarter.

And others apparently see good value in Freeport shares, as well.

For instance, Billionaire John Paulson's Paulson & Co. initiated a position of 9 million shares during that final quarter of 2012.

And there's even been some insider buying: In early March, Advisory Director Bennett J. Johnston spent nearly $504,000 to purchase 16,000 shares, bringing his total holdings to nearly 90,800 shares.

I'd obviously feel even more optimistic with more than one insider making purchases. But remember, thanks to the proliferation of stock options, restricted stock awards, and other types of variable compensation, insiders already tend to hold lots of their own company's stock.

So when they actually spend money to add to their holdings, it's worth taking a closer look.

As the old investing adage tells us, insiders sell for many reasons, but they buy for only one – they see a chance for a big profit. And, as insiders, they're closest to the action, and would presumably know the best.

And when you factor in the Paulson and Cooperman buys, this profit opportunity is just too intriguing to ignore.

The stock is cheap at 10 times earnings, and will pay you 3.8% on your money while you wait. And though copper prices are down as analysts forecast the first supply surplus in four years, a new research report released is predicting that higher-than-expected demand from China will abolish that oversupply.

[Editor's Note: In just 18 months, Private Briefing recommendations have generated two triples, three doubles and nearly 70 winners. Our experts reveal their best recommendations in the new report "The Seven Investments You Have to Make in 2013." To learn how to get a free two-week trial click here.]

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. Barbara R | March 21, 2013

    Besides a few of the negatives that were mentioned in the article was the fact that FCX didn't put this up for a shareholder vote. When shareholders (owners in the company) are NOT ALLOWED to even consider a major change in direction for their company from a copper/metals company to oil then many rightly should have a problem. The deal also smacked of real cronyism between the CEOs of the 3 companies. It was VERY REMINSCENT of what happened at Chesapeake Energy.

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