Southern Copper (SCCO - Free Report) is engaged in the mining, smelting, and refining processes of copper and other minerals. The company operates internationally in Peru, Mexico, Argentina, Ecuador, and Chile. SCCO is also involved in the production of refined gold, silver, and other materials. In addition, the company operates a host of underground mines that produce zinc and lead. SCCO was incorporated in 1952. Based in Phoenix, AZ, Southern Copper operates as a subsidiary of Americas Mining Corporation.
 

The Zacks Rundown

SCCO, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Mining – Non-Ferrous industry group, which ranks in the bottom 8% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months. This group has fallen over 25% year-to-date, widely underperforming the -15% decline from the S&P 500.

Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poor-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much tougher.

The odds are stacked against SCCO, and the stock is agreeing with this notion. SCCO experienced a climax top back in April and has been in a price downtrend ever since. The share price is hitting a series of 52-week lows and represents a compelling short opportunity as the market continues its volatile start to the year.

Southern Copper is also relatively overvalued, irrespective of the valuation metric used:

Image Source: Zacks Investment Research

Recent Earnings Misses and Deteriorating Forecasts

SCCO has fallen short of earnings estimates in two of the last three quarters. The mining company most recently reported Q2 earnings earlier this week of $0.56/share, missing the $0.95/share consensus estimate by -41.05%. The stock has moved steadily lower since the announcement, even as the market has rallied.

The company has posted a trailing four-quarter average earnings miss of -10.91%. Consistently falling short of earnings estimates is a recipe for underperformance, and SCCO is no exception.

Analysts are in agreement in terms of earnings revisions and have slashed estimates across the board. For the full year, EPS projections have declined 10.39% to $3.71/share, reflecting negative growth of -15.49% relative to last year.

Image Source: Zacks Investment Research

Declining earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.
 

Technical Outlook

As illustrated below, SCCO is in a sustained downtrend. Notice how the stock has plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. The stock is making a series of lower lows, with no respite from the selling in sight. Also, note how both moving averages have rolled over and are sloping down – another good sign for the bears.

Image Source: StockCharts

While not the most accurate indicator, SCCO has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. SCCO would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen nearly 20% this year alone. 
 

Final Thoughts

A deteriorating fundamental and technical backdrop shows that this stock is not set to print new highs anytime soon. The fact that SCCO is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Our Zacks Style Scores depict a weakening outlook for this stock, as SCCO is rated a ‘C’ in our Growth category. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of an overvalued SCCO until the situation shows major signs of improvement.

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