Dumpster Diving in Natural Resources

Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every stock has a 52 week high and a 52 week low. As an individual investor we should buy at, or near, the 52 week low and look to lock in profits when a stock is hitting its 52 week high. I like to peruse the list of 52 week low stocks -- after all, they are right there in my Wall Street Journal every day. 2 natural resource stocks were at their 52 week low last week, so I dove in and took a look.

Cliffs Natural Resources (NYSE: CLF)

Cliffs mines for iron ore and coal, both domestically and in Canada, Brazil, and Australia. Coal stocks in particular have been horrible investments in 2012, and Cliffs is no exception. From its 52 week high of $78.85 back at the start of 2012, shares are now trading near $30, a 60% decline. Ouch. But, is there an opportunity to buy when everyone else is selling? There is no perfect comparison for Cliff's, so I choose international coal mining company Peabody (NYSE: BTU) to see how they stack up against one another.

<table> <tbody> <tr> <td> </td> <td>CLF</td> <td>BTU</td> </tr> <tr> <td>Market Capitalization</td> <td>$4.2 Billion</td> <td>$6.6 Billion</td> </tr> <tr> <td>P/E</td> <td>4.65</td> <td>10.43</td> </tr> <tr> <td>Price/Sales</td> <td>0.66</td> <td>0.8</td> </tr> <tr> <td>Price/Book</td> <td>0.64</td> <td>1.12 </td> </tr> <tr> <td>Dividend</td> <td> 2.5</td> <td> 0.34</td> </tr> <tr> <td>Dividend Yield </td> <td>8.75% </td> <td>1.4% </td> </tr> <tr> <td>Debt/Equity </td> <td> 54.35</td> <td>106.46</td> </tr> <tr> <td>Current Ratio </td> <td>0.97</td> <td> 1.48</td> </tr> </tbody> </table>

All I can say is wow -- what a value investor's delight. Cliffs is trading well below book value and is paying a large dividend. But, that dividend does not look too safe when you see the current ratio under 1. The current ratio is the amount of short-term assets divided by short-term liabilities. A ratio under 1 means the company could run into a cash shortfall. At the end of last quarter Cliffs had a paltry $36 million in cash. This liquidly issue and being tied to global expansion explains why Cliff's stock is in the dumpster.

In the 10-Q, the company discloses that they have $1.4 billion of borrowing capacity with their bank line of credit.  As a prospective shareholder, I would prefer to see them cut or suspend their dividend, as they should not be paying 8.75% in dividends while taking on more debt. While Peabody has a higher debt/equity ratio, their short term liquidity is sound. It looks to me that Peabody has the ability to survive the current market cycle for coal and will reap the rewards when coal prices increase.

Bottom Line -- While I would love to own an industrial company trading below book value at its 52 week low, I need to see Cliffs cut the dividend and better use their resources before I would even consider adding Cliffs to my watchlist or portfolio.

Stone Energy (NYSE: SGY)

Stone is an independent oil and gas company based in Lafayette, La. They drill for oil both onshore and offshore in the Gulf of Mexico and Appalachia. Making money in oil and gas in these regions has been difficult in the past year, and their stock is down 29%. In a vacuum, I would not want to own a stock that is doing this poorly, but let's compare it to Exco (NYSE: XCO), a similarly sized oil and gas producer, and McMoRan Exploration (NYSE: MMR), which received a take-over bid on Wednesday by former parent company Freeport-McMoRan Copper and Gold. Exco is an onshore producer in Texas and Appalachia. The company is up 32% from its 52 week low on April 18, which shows the power of buying at or near a 52 week low. McMoRan drills for gas both offshore and on shore in the Gulf. Even after the take-over was announced, McMoRan is trading below its 52 week high.

<table> <tbody> <tr> <td> </td> <td>SGY</td> <td>EXCO</td> <td>MMR</td> </tr> <tr> <td>Market Capitalization</td> <td>$944 Million</td> <td>$1.6 Billion</td> <td>$2.49 Billion</td> </tr> <tr> <td>P/E</td> <td>6.39</td> <td>N/A (No earnings)</td> <td>N/A (No earnings)</td> </tr> <tr> <td>Price/Sales</td> <td>1.06</td> <td>2.87</td> <td>6.01</td> </tr> <tr> <td>Price/Book</td> <td>1.17</td> <td>3.88</td> <td>2.81</td> </tr> <tr> <td>Dividend</td> <td>0</td> <td>0.16</td> <td>0</td> </tr> <tr> <td>Dividend Yield</td> <td>0</td> <td>2.1%</td> <td>0</td> </tr> <tr> <td>Debt/Equity</td> <td>98.17</td> <td>436.09</td> <td>34.85</td> </tr> <tr> <td>Current Ratio</td> <td>1.86</td> <td>1.7</td> <td>0.91</td> </tr> </tbody> </table>

After looking at these numbers I am liking Stone Energy much more. The current ratio of 1.86 along with $379 million available under their bank line of credit tells me Stone will not run out of cash as they fund their drilling program. I have owned shares of large cap Chesapeake through their ups and downs and if they had a balance sheet like Stone, I would be a happier shareholder. McMoRan has the best Debt/Equity ratio, but has the worst current ratio. Meanwhile, EXCO has $1.85 billion in debt and continues to pay a dividend yielding 2.1%.

The purchase of McMoRan did allow Stone's stock to go up, but I do not believe Stone is a take-over candidate. Over the next few weeks, I think the independent oil and gas stocks will head back down once the market realizes that the Freeport's purchase was not the start of a consolidation wave.

Bottom Line -- I think Stone will be on the 52 week low list a few more times, as natural gas stocks are not doing well. Add in the possibility of a recession from the fiscal cliff and there is no need to be a hero and buy this stock now. However, once it is around $17 I will be ready to buy for the inevitable turn in the natural gas stocks.

CoachUrMoney has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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