Double (or Triple) Your Money With These 4 Cyclical Stocks
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the markets at all-time highs, many investors are worried they've missed their opportunity--but they haven't. Rest assured, while the easy money may be gone, value stocks exist in every market.
Many stocks in materials, mining and metals are at multi-year lows and have largely missed the rally. Despite strong performance in the underlying companies, stocks in these sectors sell-off frequently into economic uncertainty, creating wonderful value opportunities.
Here are a few of the best value stocks in mining and metals today.
Gold is one of the most unique metals, because its price fluctuates on so many factors aside from actual physical supply. If supply mattered, prices would be much higher than they are right now, as there is truly an enormous scarcity of this precious metal. Barrick Gold (92% of revenues from gold) and Freeport-McMoRan (15%) help the world find it.
These stocks have both seen their prices decline, in part because of an improving economy. As odd as that may sound, an improved economy means that fewer investors will flee to hard assets like gold, thus lowering gold's value. But that doesn't tell the whole story; Freeport has many other business lines (gas, copper, etc.) and Barrick's stock suffered even when gold prices were at multi-year highs.
The truth is that these two stocks are the "ugly step children" of the market--no matter what they do it's just not good enough. Despite out-performance, investors shy away from Barrick out of a fear of gold's future. Likewise, regardless of performance Freeport will always have a negative headline out about its gold exposure or some conjured up negative impact that China and India are having on copper.
The headlines are merciless, the opinions are negative, but here are the facts:
- Both companies are poised to see revenue growth from rebounds in gold prices, and Freeport will also benefit from increased copper output.
- Both companies have solid, positive earnings and dividends north of 3%
- Both companies have a history of meeting (not beating) annual (not quarterly) earnings estimates.
And while that last point might seem obscure, it's actually the most profound. Freeport is projected to earn $4.38/share this year and Barrick is projected to earn $4.09. With stabilization of their core markets it's likely that these stocks could each see a P/E of 12 at some point in 2013. Should that happen, the stocks will trade at prices near double their current value.
Alcoa (NYSE: AA)
Alcoa is by far the most speculative name on the list, as they haven't been performing all that well. The company's earnings were at a multi-year low of just $0.24/share in 2012, but Alcoa recently reported earnings that point to a brighter future. The aluminum maker kicked earnings season off with a bang, checking in with a strong beat of estimates and a 59% increase in earnings, although results were slightly aided by one-time benefits.
But one-time items aside, Alcoa still beat expectations (of $0.08) with earnings of $0.11/share, ahead of last year's numbers. What makes these results impressive is actually the fact that aluminum prices are down. Yes, low aluminum prices are a downer, but they're cyclical, and if Alcoa is turning out a strong profit in this environment, what will it do when aluminum prices rebound?
The company traded near $40 in 2007 and in the high teens just last year. If Alcoa can keep its business profitable through this cyclical lull, an $8 share price (today) might end up being a bottom, or even a generational low.
Steel Dynamics (NASDAQ: STLD)
Steel Dynamics has also managed to turn positive earnings on cost reductions and operational efficiency, but in fairness it's been far more reliable a performer than Alcoa. The two companies are in a similar position, though, as their metal markets are set for rebounds--steel especially. Compared to competitor U.S. Steel, Steel Dynamics stands out as it's weathered a tough environment for steel and managed to stay profitable each of the past five years.
Few people know Steel Dynamics intimately, and the company's only real claim to fame was due to Bain Capital's (and Mitt Romneys) involvment as early investors. But besides the Presidential acclaim, there are three big reasons to like Steel Dynamics:
1. The company offers a vastly higher dividend yield than any of its much larger competitors.
2. The company has multiple revenue streams through recycling and ferrous operations that can guide it through a relatively weak short-term outlook for steel.
3. Despite paying a very high dividend, Steel Dynamics has actually doubled its cash position since 2010 and recently agreed to purchase back a large amount of debt.
Steel Dynamics could be stuck in neutral for a while, due to negative short-term factors for steel. But when steel does ramp up again, you'll be looking at a firm that's selling at less than half of what it did pre-recession. The company pays a dividend over 3% and its earnings are set to double by 2014 (and triple by 2015)--I like it here at a cyclical low.
Cyclical lows are buy signals
In 2007 metals and mining lead the market to all-time highs. Fast forward six years and the stock market has recovered, but these stocks haven't.
The reason is actually pretty straightforward--the economy (and construction) was much more bullish in 2007. People were in stocks out of optimism, whereas today they're in them because bonds and CD's return nothing. But sooner or later, if this recovery is to continue, the prices and output from these companies must improve.
Everything is cyclical. Prices stabilize, inventories are replenished, and stocks rise. If we're truly getting in on a cyclical low in inventories and metal prices (from 2007's levels) these stocks could all double or even triple from here.
Adem Tahiri owns shares of Freeport-McMoRan Copper & Gold and October 19th calls of Alcoa. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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!