This Value Play Could Score Traders 15% Returns by Early 2014

During bull markets, often the best way to trade is to go with the momentum. That's usually the route I like to take, but there's another way to trade that can also net you big results. That is to identify sectors that have come under fire that have the potential to move much higher, i.e., value trades. The multi-national industrial mining sector fits this bill.

One great way to play this sector is with iShares MSCI Global Metals & Mining Producers (NYSE: PICK). This exchange-traded fund (ETF) holds the biggest industrial mining companies, including BHP Billiton (NYSE: BHP), Freeport-McMoRan Copper & Gold (NYSE: FCX) and Rio Tinto (NYSE: RIO).

Although PICK is down 12% year to date, the fund has seen some strong buying during the past four months, rising 27% since its July 5 low.

PICK Chart

The reason for the buying in the industrial metals sector of late is partly due to the general rebound in global stocks, but it is also partly due to the global economic recovery thesis centered around China. Solid GDP data and good manufacturing numbers out of that country, one of the biggest consumers of industrial metals such as iron ore and copper, have created a bid higher for PICK.

Also helping the bullish case recently was news from Codelco, the world's biggest copper producer, which announced it was poised to raise the fee it charges Chinese buyers to the highest level since 2005 due to increasing demand. Adding fuel to the global metals growth thesis on Monday was Goldman Sachs (NYSE: GS), which upgraded the steel sector to "neutral" from "cautious." Then, we saw Jefferies deliver a positive report on Q4 iron ore demand emanating from China.

The Goldman report basically was a valuation thesis, similar to mine, as analysts argued that all the bad news was priced into stocks in the space. The more subtle and intriguing thesis, however, was the Jefferies call.

The firm attributed some of its bullishness on iron ore to impending construction of affordable housing in China. The report also said that recent surging Chinese property prices aren't so much the result of a speculative bubble as they are the reflection of a lack of housing capacity.

The lack of capacity inflates prices for existing homes, and that's not something the Chinese government wants to see take place. So, one way to remedy this situation is to build more affordable units, and that's what Jefferies says will take place next year.

"Interestingly, this increased demand comes at a time when iron ore supply usually dips," said Tom Essaye, editor of The 7:00's Report. "The bottom line is we're seeing more anecdotal evidence of a 'turn' in the industrial metals and for industrial metal miners, and the space still remains a value."

I concur with this thesis. So, if you want to take advantage of the aforementioned confluence of positive catalysts in the industrial metals and mining space, then PICK is a good bet.

Recommended Trade Setup:

-- Buy PICK at the market price
-- Set stop-loss at $18.79, approximately 8% below the current price
-- Set initial price target at $23.50 for a potential 15% gain in three months

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