3 Perfect Basic Materials Stocks

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

I'm a big fan of the idea that the individual investor has the edge in the stock market. I've heard all of the comments and read the articles that say big traders rule the day, but I'm not buying it. I subscribe to Peter Lynch's theory that sometimes the “smart money” isn't as smart as it thinks it is. He said that the individual investor has access to information that can take a while to reach Wall Street. One of the ways that individual investors unite to try and beat the “big guys” is through Fool.com. Specifically, members of the site can make stock picks using the CAPS system. This stock picking game allows individuals to rate their favorite stocks on a 5 star scale. A perfect 5 star rating is rare and should represent a unique opportunity, but an even better opportunity would be stocks that have just achieved this coveted rating. I recently ran a screen for stocks that were raised to this “perfect” rating in the last month. Three stocks in the basic materials industry seemed promising and deserve further research.

Canadian Natural Resources:

Canadian Natural Resources (NYSE: CNQ) as you might imagine is involved in the exploration and development of oil and natural gas. The oil and gas industry is ripe for continued consolidation, as this is an industry where bigger is definitely better. With this in mind, CNQ seems to fit the mold of many other exploration companies as they are investing for future profitability. In the last three years, the company's net income has increased a total of 76%. While this is good, this increase in net income has been paced by the company's capital expenditures growth. This helps explain why the company's dividend of 1.48% is still resulting in a free cash flow payout of over 150%. This seems to be a theme with natural resource companies. They generally pay a dividend even if it appears they can't afford it with the idea of rewarding shareholders while they wait for future projects to come online.

In addition, the company has dramatically improved its balance sheet over the last few years by cutting long-term debt from over $10 billion to $7.4 billion today. While this is still a large debt load, the company's lower interest expense should help results going forward. With analysts calling for about 9% EPS growth in the next few years, and the stock selling for about 12 times forward estimates, it looks fairly priced at the current time.

Halliburton Company 

Halliburton (NYSE: HAL) is one of the larger oil services companies. If companies like Exxon and Chevron are like the gold prospectors of old, than Halliburton is like the people selling the picks and shovels. The great thing about being in the oil services business is the demand for energy production is constant and the business seems to grow every year. In fact, in the last three years Halliburton's net income has more than doubled. The company also is expected to grow quickly in the next few years, with analysts calling for a future growth rate of nearly 17%.

Halliburton might beat these expectations as well, because the company has beaten earnings estimates in three of the last four quarters by an average of 3.1%. While Halliburton's yield may not get investors excited at about 1.09%, the company achieved a reasonable free cash flow payout ratio of 45% in the last three months. Considering that the company's payout ratio has been negative for the three prior quarters this could signal better financial performance in the future.

LyondellBasell Industries N.V.

LyondellBasell (NYSE: LYB) is a chemicals and polymers producer, but the company's operations also include solutions for crude oil refining. To say that this company's business has dramatically turned around would be an understatement. Three years ago the company posted a loss of over $2 billion due to troubles connected to the Great Recession. Last year, the same company posted net income of over $2 billion. In addition, operating cash flow jumped from a negative $787 million to $2.869 billion last year.

This huge jump in cash flow also has led the company from a net debt position on the balance sheet to a net cash position of over $1.5 billion. With analysts calling for 10% earnings growth going forward and the stock selling for a forward P/E of about 8.5, it looks like a good value. When you add in the fact that the stock pays a 3.3% yield, and this is covered with a less than 13% free cash flow payout ratio, this stock should be at the top of many investors buy lists.

Conclusion

As you can see, there are opportunities in the basic materials industry if you know where to look. Since each of these companies is rated 5 stars by the CAPS community, this is a good place to start. Use this information as a starting point for your own research. If you want to keep up with developments in this industry, just add one or all three companies to your personalized Watchlist.


MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. 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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