What We Said
By Jon Birger

(FORTUNE Magazine) - What We Said

As a way to ride the commodities wave, we named Phelps Dodge (PD $140) as one of our ten top stocks for 2006 in our recent Investor's Guide. The commodity we had in mind was copper, which had been rising sharply on demand from China and India. Phelps Dodge, we noted, is the world's No. 2 producer, and it traded at an attractive nine times the previous year's earnings.

What Happened

Shortly after we went to press, Phelps Dodge stock soared from $143 to a 52-week high of nearly $157. But on Jan. 10, PD announced a sharp drop in expected earnings for the fourth quarter, citing hedging losses--and production shortfalls. The stock fell 5%, to below $147, on the news; it has since dropped another $7. We still like copper--it's up 4% this year--and we still think Phelps is a well-run mining company and an underpriced stock. Phelps has a price/earnings ratio of nine, well below its ten-year average. Still, the hedging revelations make it clear that Phelps stock isn't a simple proxy for copper. If the company is hedging against lower copper prices, there's going to be less upside when prices rise. Top of page