Industry Leaders in the Bargain Bin
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every president has an agenda. President Barack Obama is no different. In fact, he's been quite clear about some of his thoughts from day one. For example, reducing defense spending and clean energy are two stated goals. For astute investors, the sell off following Obama's reelection can offer some contrarian buying opportunities in industry leading companies like Lockheed Martin (NYSE: LMT), Peabody Energy (NYSE: BTU), and Alliance Resource Partners (NASDAQ: ARLP).
Lockheed Martin is an interesting stock right now given the spending cuts that are slated to take place in the U.S. defense budget. The so-called sequestration cuts that have been written into law are likely to be painful for the industry if enacted. However, most agree that the draconian cuts are not likely to take place, with Obama himself hinting as much in the presidential debates. Even if the cuts do take place, it is still unclear how they will impact industry participants. With its massive scale and reach, Lockheed Martin will definitely feel the pinch of any cuts, but it is also very likely to survive any cuts that do take place. Longer term, the company is probably one of the best positioned defense companies around. Its fingers extend into virtually every aspect of the industry from space exploration to military services, including expanding operations in the technology space. The best part is that Lockheed's dividend is large and has historically been increased on an annual basis.
Peabody Energy is by far the largest and most diversified publicly traded coal company. Despite the sell off and inherent political risks, it is a good choice for more risk conscious investors because of its ability to participate in both domestic and foreign markets. Indeed, it has material operations in the United States and in Australia. The later gives it direct access to the Asian market, where demand for coal is expected to continue to grow as the economies there expand. Although China is the first country that comes to mind in the region, there is also India and the many smaller countries that are rapidly developing. Peabody has also been hinting that it is seeing a turnaround in domestic demand, as natural gas prices have headed higher. A continuation of that trend would be a welcome relief. Indeed, despite coal's lack of popularity, it is still a cheap and abundant domestic fuel source with a material installed base of power plants.
For dividend focused investors like myself, however, Peabody's yield is a bit low. If dividend income is an important consideration, I suggest taking a closer look at limited partnership (LP) Alliance Resource Partners. Alliance is one of the largest coal focused LPs and has a relatively long and solid track record. Its operations are based primarily in the Illinois Basin, Central Appalachia, and Northern Appalachia. Its customers are primarily located in the United States, which means it has materially less diversification than Peabody. That said, the LP structure allows for certain tax benefits and a materially higher distributions to flow through to unit holders. Impressively, distributions have been increased every quarter since mid-2008. Note, too, that the export of coal is likely to increase over time, which would provide additional markets for Alliance to tap. With a yield well above that offered by Peabody, more aggressive income investors should take a look.
Even if the shares of these three industry leaders rebound for the post election sell off, which is not unusual after a steep decline, dividend investors should keep an eye on them. The market can go to extremes over short periods of time, but Obama's longer term goals aren't likely to alter nearly as quickly. Indeed, there might be additional buying opportunities for those with a long-term focus.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. 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.