Three Bargains: APL, POT, FCX

By Declan Fallon - March 22, 2012 | Tickers: APL, CF, FCX, POT, SQM | 0 Comments

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Bargain Hunting is a tricky business; in many cases one overpays for a lemon, but once in a while you can find a real gem.  It's finding these gems which makes swallowing the lemons all the easier.  Stock Picking is no different.  "Finds" can turn into disappointments; on the spin of a bad earnings release, a 'shock' news item, or simple bad timing.  But when a portfolio booster is discovered it becomes a lot easier to cull the losers and focus on the winners. 

In my screen for March there were ten potential candidates to consider.  These included three chemical companies and two miners.  

Of the ten, the stock with the highest dividend yield was Atlas Pipeline Partners (NYSE: APL).  Atlas Pipeline is involved in the gathering and processing of natural gas, in addition to the transportation of natural gas liquids.  Not surprisingly, profits are driven by rising natural gas prices, but natural gas prices have been in a steady decline since the middle of 2011; falling from a peak of $4.92 in April 2011 to the current $2.19.  Based on current trends, natural gas prices are on course to test, if not break, the last major low in 2009 when prices bottomed at $1.92.  On the back of falling natural gas prices, Atlas has done its best to disappoint Wall Street, reporting well below Wall Street expectations, missing by quite a margin in six of the last eight quarters; for example, 2011 Q4 estimates called for a $0.38 gain, but the company reported a loss of -$0.14.  So with natural gas prices trading near all-time lows, and a series of inconsistent earnings reports under its belt, what is there to like about Atlas? Well most of it boils down to the 5.5% yield, a yield supported by a stock priced in the $30s.  The stock has retained all of its gains from the low in 2009, back when natural gas prices were trading at an all-time low and investors feared for Atlas' survival.  In 2007, the stock managed a high of $55 on a yield of 6.1%, supported by Natural Gas Prices in the $7s.  Currently we have Atlas in the $30s with a yield at 5.5%, hindered by Natural Gas Prices in the low $2s.  At some point, sooner rather than later, Natural Gas Prices are going to turn higher.  Higher Gas Prices will boost Atlas's bottom line, increase the dividend payout, boost yield and ultimately drive the stock's price higher.  

The three chemical companies on the scan were Socquimich (NYSE: SQM), Potash Saskatche (NYSE: POT), and CF Industries Holdings (NYSE: CF).  Three companies with fingers in the Agriculture pie, a pie which is only going to get bigger as the world's population grows.  Two are trading near all-time highs, but one is playing the sleeper which may offer the better bargain.

Potash Saskatche  was very much the darling of 2007-08, rallying from the mid-teens to nearly $80 in the space of 18 months.  The crash of 2008 took the froth off the price, but didn't kill the underlying rally.  While its peers have enjoyed the limelight, Potash Saskatche has quietly gone about its business.  The stock trades in the mid-$40s after a brief surge into the low $60s in early 2011 failed to stick.  It's swoon lower wasn't helped by a disappointing Q3 and Q4 which failed to come in ahead of Analyst expectations as in previous quarters.  Next quarterly earnings are due at the end of April, and while expectations are for a slight improvement it could still come in below the target of $0.91.  Despite this, earnings continue to improve quarter-on-quarter and its P/E of 13.31 is attractive when compared to high flying Socquimich's 28.5 and CF Industries 8.43.  But it's the lackluster price action which ironically makes it attractive.  The stock hasn't collapsed as may be expected when momentum exists elsewhere.  Buyers look prepared to support it on drops below $40 which suggests somebody is quietly accumulating it.  Trading volume is just a fraction of what it was in 2008 and 2009, reflecting a stock which has dropped off the radar of most traders and investors.  This is a stock ideally suited to the dollar-cost-average approach for investing and should certainly be included on your watchlist.

Finally, what of the two mining stocks on the list: Freeport McMoran (NYSE: FCX) and Pan American Silver.  Both have seen reversals from highs and remain in downward trends, but one is better positioned to benefit from a recovery in the economy than the other.

Freeport McMoran is a copper and gold miner.  Copper is a key component in semiconductors, which is a leading sector in an economic recovery.  Semiconductors are enjoying a revival with the Market Vectors Semiconductor index (SMH) clearing a 7-year high.  This can only be good news for copper miners.  While mining companies typically have interests in a number of different metals , Freeport McMoran is very much in the copper group with 120 billion pounds of copper in proven and probable reserves as of December 2011.  Naturally, a weak semiconductor sector will depress demand for copper and this has been the case since the Tech crash of 2000. The credit crunch of 2008 was simply a kick in the teeth of a sector already down on its luck.  During this time, Freeport McMoran has seen some erratic quarters, with softness in copper demand offset by big gains in gold.  However, things may be about to change.  Copper prices have traded around $4 since prices peaked in 2006, but with semiconductors driving demand it may break that shackle and rise to challenge $5 or more.  This can only be good news for Freeport McMoran, especially if rising gold prices can contribute to the bottom line. 

So there you have it, three stocks - three potential bargains.

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