This Stock is a Coiled Spring

Brit Ryle

Posted April 22, 2024

When Second Place is a Winner

Australia is the world’s biggest producer of iron ore used to make steel. No surprise it’s home to the world’s largest iron ore mine, operated by London-based Rio Tinto (NYSE: RIO).

Brazil is the world’s second-largest iron ore producer and also home to the world’s second-largest iron ore mine, operated by Vale (NYSE: VALE). 

Now, it usually pays to invest in the top dog of a sector. Like in 2017, when I went looking for a cybersecurity play, Palo Alto (NASDAQ: PANW) was the best choice at $138 a share. The stock hit a high of $380 in February.

Nvidia (NASDAQ: NVDA) has trounced the performance of AMD (NYSE: AMD) over the last 18 months. Netflix (NASDAQ: NFLX) has been the only way to play streaming. 

In the social media space, we sadly don’t have Twitter to kick around anymore and Tik-Tok owner ByteDance is not public. Which I guess leaves Snapchat’s parent company (NASDAQ: SNAP) as the only alternative for Meta (NASDAQ: META). That one’s no contest. 

Even though it’s been cut in half this year, Tesla (NASDAQ: TSLA) has still done better than GM (NYSE: GM) since 2020 — which probably tells you all you need to know about automobile stocks…

But with iron ore, I gotta buck the trend and tell you that Vale is the way to go. 

For one, there’s Vale’s chart: 

Buying shares around $12 has been a pretty good idea for the last few years. Of course, the COVID bull market — Vale shares ran from around $11 to over $22.

From a low of $11.45 in late 2021, Vale hit $20.80 at the end of March 2022.

Then the rally from $12.17 in August 2022 got cut a little short just over $18 last January. 

Now, Vale shares have been moving sideways between $12 and $15 for over a year. 

That’s what we call a coiled spring. The next move could easily take it back to $18 or higher…

The Coiled Spring

Vale is very cheap. Earnings are expected to be flat for the next fiscal year, and the lack of growth is why the forward price-to-earnings ratio is just 5.5.

It could certainly be argued that an escalating trade war with China and the promise of more tariffs on Chinese steel could be a negative for iron ore prices. 

This is why mature companies pay dividends. And over the last couple of years, Vale has paid a huge dividend. In 2021, it paid out $2.53 in dividends, which would be a 20.7% yield at the current price. 

2022 was lower, but the $1.11 was still a 9.1% dividend at the current price.

2023 got a $0.88 dividend, 7.2% yield at the current price.

Vale has already paid a $0.55 dividend last month. Investors assume that will be the lion’s share of the total 2024 dividend. That’s why the stock is trading down to $12.20 today. 

However, current levels around $12 have been a springboard in the past. A surprise for Vale’s dividend will get him his coiled spring stock bouncing higher. 

 Briton Ryle

Chief Investment Strategist
Pro Trader Today