Three Contrarian Picks
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the market consistently hitting new all-time highs, the best companies in the market are starting to look overvalued when compared to historical valuations. That said, there are some companies that still look undervalued, however they are not currently in favor with the market and have become slightly contrarian in nature.
So, here are three contrarian picks to help navigate the market in these uncertain times.
An unloved miner
Hecla Mining (NYSE: HL) is a contrarian play on the silver-mining sector and the company has one of the longest histories in the industry. Hecla has been around for more than 100 years. During that time, it successfully navigated the highly volatile price of silver, which by inflation adjusted prices has exploded above $30 or $40 per ounce three times during Hecla's history before consistently crashing back down to around $5. This means Hecla is well experienced to outlast the rough periods while saving during the boom times.
The weakness in the silver market has provided a great opportunity to buy into Hecla and the company is now trading at its lowest valuation in 35 years.
Additionally, after the CAD$750 million acquisition of Aurizon Mining, funded from cash ($200 million saved over the past few years) and a $500 million debt issue, which was oversubscribed (Helca increased the initial $400 million issue by 25%), Hecla has increased shareholder equity by around 70%.
Moreover, Hecla has been building a steak in Brixton Metals, a Canadian precious metals exploration company with a highly experienced management. Currently trading at $0.13 per share, Brixton is cheap. The market, however, is not placing true value on the company's exploration projects, which could be some of the best in the world with initial samples indicating grades of 7000 g/t Ag. Hecla's slow acquisition of its holding in Brixton (20%) means that the company is not overpaying for some potentially game-changing reserves.
Hecla has plenty of room to churn out cash for shareholders in the future. Moreover, with a book value per share of $6.60, including the recent Aurizon acquisition, Hecla looks to offer significant value and the stock price could have reached a bottom.
A unloved Cat
Caterpillar (NYSE: CAT) has fallen out of favor with the market after well-known short seller, Jim Chanos, revealed that he had taken a position in the stock. Still, it would appear that after recent declines, the majority of the bad news is priced into the stock.
The company trades at a lower valuation than it did in 2008 and 2009, when the global economic outlook was considerably worse than it is now. On a EV/EBIT basis, the company trades at a ratio of 9.7x compared to the ratio of 10.6 for 2008 and significantly below its five-year average of 15. In addition, the company's book value per share has rocketed from $11 in 2008 to $26.80 as of 2012. So, the price-to-book value is at its lowest in five years, 3.3x compared to the five-year average of 4.2x.
Still, there are worries about a slowdown in machinery sales, which are well founded. But the company has built up a strong and highly lucrative financing division, with a 20% profit margin and which now accounts for 16% of net income as of the first quarter.
Moreover, Caterpillar has been around for more than 100 years and has survived through it all. The company has paid a dividend for the last 25 years straight and total returns are in the top 25% of the S&P 500 - with so much value and history on offer Caterpillar is hard to turn down.
A play on Europe
Bank of Ireland (ADR) (NYSE: IRE) is a risky and contrarian play on the recovery in Europe. In particular, the recovery in Ireland, which appears to be gaining far more traction than any other economy in the Eurozone. Indeed, home prices in Ireland have started to bottom, positing their first gains in several years last month. Manufacturing is also on the recovery ,with Investec's purchasing managers index for manufacturing firms staying above 50 for most of 2012; signalling expansion.
Investors are slowly returning to the Irish economy and like Bank of Ireland's outlook. Indeed, this confidence shows in the company's recent debt issue; $650 million of three-year unsecured debt at a yield of 2.7%, which was almost half of the rate the bank paid to borrow back in September 2009. Actually, this rate is less than many US banks are being asked to pay.
From a bottom-up view, the bank's net interest margin expanded 14 bps to 1.3% during 2012 and, as of the end of 2012, the banks' loan-to-deposit ratio was below 130%; that's down from 175% in December 2010. The bank's Tier one capital ratio is reaching 14%, which is higher than that of banking-giant Wells Fargo, which has a ratio of 12.1%.
Overall a risky but well-balanced play on Ireland's recovery.
All in all, these three contrarian picks are risky but to an extent they all have features that support their long-term investment thesis. Caterpillar has a rich heritage and is a world leader in its field. Hecla is over 100 years old and is trading at its lowest valuation in 35 years; and Bank of Ireland is the biggest bank in its home market that is rapidly returning to health. Overall, all three plays offer some good rewards for a low level of risk.
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.
Fool contributor Rupert Hargreaves owns shares of Caterpillar. The Motley Fool has no position in any of the stocks mentioned. 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!