5 Stocks Ready to Rise
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I think that several material-related stocks have not anticipated the current Chinese recovery. In fact, recently Li Keqiang, China’s next premier, wrote in a full-page article in the People’s Daily how urbanization will be a “huge engine” for Chinese growth and said it will expand domestic demand, actively promote urbanization, strengthen real-estate controls, and support small business. Since September, China has reported stronger growth numbers. In the article below I detail several stocks that are heavily related to the Chinese economy and have not priced the change in the whole Chinese picture.
The first stock is Vale (NYSE: VALE). This iron ore producer trades at only 7x, well below peers BHP Billiton (12x) and Rio Tinto (22x). The miner also pays a solid dividend that yields over 6%. The demand for Vale's main commodity, iron ore, will probably increase over the next two decades. Rio Tinto has predicted that Chinese steel production will keep increasing until the year 2025. That may lead to a higher demand for both coal and iron oil. I project the Chinese economy growth picking up from below 8% this year as a new government in Beijing relaxes restrictions on real estate investment and pushes infrastructure spending, which will drive demand for steel and in turn iron ore. The stock was recently bought by top value investor John Burbank, founder of Passport Capital.
The second stock is US Steel (NYSE: X). The stock is a play on China and the rebound in the US auto sector. U.S. auto sector is experiencing continued improvement in sales. X is a strong play to catch this trend as its shipments to the auto industry account for as much as 15% of its total shipments (as of 2011) and it has grown its business in this market by almost 80% in the past three years. I think that the worst is already priced in, as the stock is down almost 22% YTD and more than 50% in the past 2 years. The company has a forward P/E of 12x and is trading at a cheap 0.82x P/BV. EPS next year is expected to rise by 113%. Insider ownership is up 27% over the past six months, and the company pays a dividend of around 1%. John Burbank also bought X.
I also like John Deere (NYSE: DE). Deere currently trades at 11x P/E, compared to 15.5x P/E for the S&P 500. This multiple is near the bottom of its range of 9-20x and below its average of 13x. Deere's balance sheet is strong, with almost $6 billion in cash and equivalents and a current ratio of over two. The debt levels are high at over $31 billion, but the majority of this debt is backed by high quality receivables from the financial services arm. The long term prospects remain undoubtedly good, a reason why Berkshire Hathaway picked up 3.98 million shares, according to its latest filing. Deere remains the global leader in agricultural equipment and an increase in global food production or a better Chinese economy that requires a more productive agricultural industry will favor Deere. In addition to Warren Buffett, value investor Robert Olstein bought DE in the last reported quarter.
I also think that Caterpillar (NYSE: CAT) is a stock that's ready to rise. I like CAT because despite a weak economic backdrop, Caterpillar posted a record third quarter in terms of both revenues and EPS. For fiscal 2012, Caterpillar expects sales in the range of $66 billion and EPS in the range of $9.00 to $9.25. The outlook, even though lowered from the prior guidance, if achieved would mark the highest sales and profit in Caterpillar's history, exceeding last year's record levels, according to Zacks Research, which rates the stock as Neutral. I think that CAT guidance is pessimistic on the Chinese economic recovery and results could surprise to the upside if that projection does not materialize. I also think that Caterpillar is a solid pick to play the current US real estate recovery. Value investor David Dreman bought the stock in the past quarter.
Lastly, I think that SunPower (NASDAQ: SPWR) could rally from current bottom-levels. The stock recently beat earnings and EPS projections and executed well on its cost reduction road map during the quarter. SunPower's goal of reducing panel costs by at least 25% year over year is on plan and management is taking steps to accelerate the 2013 road map in order to improve production and reduce costs. First Solar is already rallying because investors expect a solar sector recovery indirectly generated via an improvement from the Chinese economy. Contrary to many competitors, SunPower's balance sheet is still in relatively good shape. Cash and cash equivalents increased to $366 million, and inventory was reduced by $65 million. They're deferring most capital expenditures to 2014 in order to save cash. Gross margins, at 15.1%, are way above most of the competition.
martinzaldua 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!