The latest U.S. railway traffic data shows metallic ores and metals volumes have decreased by a significant 19.7% this week and more than 5% year over year.
Although much of the slowdown in metals traffic can be attributed to supply chain glitches, it also suggests that demand is waning.
Lower demand for precious and industrial metals is a leading indicator of a coming economic downturn.
Source: The Association of American Railroads.
One could double down on the argument by paying attention to the U.S. Treasury Yield curve, which shows signs of inversion. An inverted yield curve has successfully predicted recessions on many occasions, as it essentially describes the implied economic environment.
In the event of a recession, metals and mining stocks will likely capitulate. As such, here are two stocks to avoid.
Sibanye Stillwater
First up is Sibanye Stillwater Ltd. (SBSW, Financial), which is facing headwinds from all directions. The company's operations in South Africa came to a standstill when its employees went on a prolonged wage strike. Additionally, South Africa is struggling with electricity problems as many of the nation's energy plants are defunct and its employees are also on strike, demanding higher wages.
Furthermore, a flood in the state of Montana caused a pathway to one of Sibanye's palladium mines to erode, halting the mine's operations for the next six weeks.
Lastly, although Sibanye is undervalued on some fronts, the stock is trading at 1.22 times its book value. Mining companies often oscillate around their fair book value due to the tangible nature of their assets. Thus, there is a strong argument the stock is overvalued on a relative basis.
Newmont
Even though Newmont Corp. (NEM, Financial) owns various copper assets, the company is still considered to be a gold mining pure play. Thus, given the rise of the U.S. dollar amid increasing interest rates, we are likely to see gold prices taper off soon.
To substantiate my gold price drop claim, Phillip Streible, chief market strategist at Blue Line Futures, said, "Gold will unlikely see any upside unless inflation deteriorates enough to stop interest rate hikes or if other central banks start to be as aggressive as Fed, and that can weaken the dollar."
Source: Goldprice.org
Newmont's first-quarter results revealed an 8% year-over-year drop in production, which speaks volumes for the demand side as it was expected that production would rise amid post-pandemic reopenings. The company produced 1.34 million ounces during the quarter to achieve revenue of $3.02 billion and earnings of 56 cents per diluted share.
Furthermore, the stock is overvalued on a relative basis as it is trading at 2.15 times its book value, 46.27 times its earnings and 3.75 times its sales. Additionally, Newmont is trading below its 10-, 50-, 100- and 200-day moving averages, conveying a downward momentum trend.
Concluding thoughts
Key metrics and financial theory suggest Sibanye Stillwater and Newmont are both in danger of underperforming. More specifically, metal prices, implied industrial production and market cyclicality all point toward the downside for both stocks.
