Dig into this Sector for a Bargain
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Dow and the S&P 500 hit multiyear highs this past week, following an announcement by the European Central Bank to buy up struggling E.U. country bonds, effectively building a ceiling for their lending rates. The rally extended far beyond European stocks, boosting most international index funds, bank stocks, and utility stocks. While the rally boosted all but the hopeless, plenty of good companies still sell at reasonable prices. In stark contrast to broader indexes, the mining sector still features valuations at multiyear lows.
BHP Billiton (NYSE: BHP) is the world’s largest mining company, with a diverse product line and operations in almost every country. The company mines everything from gold to cobalt to iron ore to minerals you’ve never heard of. It currently trades at a P/E of 7, even with a high profit margin of 33%, a 3.5% dividend yield and sectorally low debt. Between high margins, diverse products and solid management, BHP Billiton is built to outlast cyclical downturns while giving investors income.
Vale (NYSE: VALE) has a P/E of 4, which makes it not only one of the cheapest mining companies but also one of the cheapest megacaps. Vale, a Brazilian parastatal, is the world’s largest iron ore producer. Vale’s stock price and earnings have suffered from declining demand in China, which has pushed the spot price of iron ore down, a trend that the European Central Bank’s program will not reverse. Vale is in for rocky earnings until China stabilizes but the price of iron ore is highly cyclical and Vale will eventually rise with it.
A host of smaller, specialized mining companies are also trading low. Dan Carroll makes a compelling case for Freeport-McMoRan (NYSE: FCX), a company specializing in copper and gold mining, boasting sturdy fundamentals, and giving out a 3% dividend yield with plenty of room to grow. However, at a P/E of 11, Freeport-McMoRan is, by that metric, the most expensive company in this round up.
On the other hand, Cliff Natural Resources (NYSE: CLF) trades at a P/E of 3.5, a steal if the iron and coal markets have bottomed out, but they probably have not – Trefis even argues that coal will never recover. Cliff’s stock price has dropped 70% since January, but on the upside its dividend yield stands at 6%, which is a nice incentive to wait out the coal and steel markets.
Europe’s news boosted stock prices in the mining sector about 10% in two days, but the sector will not recover until China stabilizes. Mining remains a pocket of multiyear lows in a market full of multiyear highs. Falling commodity prices have hit all of these companies’ stock prices hard and they will likely fall further, but the downturn presents an excellent opportunity for the discerning long-term investor.
CallaMarie owns shares of Companhia Vale Ads. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.