3 Stocks That the Rally Forgot

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

It's amazing just how far the stock market has rallied in recent years. Just a few short years ago, in the depth of the crash, growth stocks like Amazon and Chipotle were trading under $100/share. Now many of those blue chip growers have increased over 100% in value, and even the most questionable of businesses have rallied. 

This makes it a bit surprising, and curious, when you do run into a cheap stock these days. Even more curious are today's cheap stocks whose underlying businesses appear stable.

It makes you wonder, does something always have to give?

Value in metals

One of the most interesting, and potentially dangerous, industries for values is metals and mining. This cyclical industry has had many precious and industrial metals, such as gold and steel, suffer steep price declines. Two stocks that have felt the impact of declining metal prices are Steel Dynamics (NASDAQ: STLD) and Freeport-McMoRan (NYSE: FCX), but I would argue that their stocks have suffered more than their actual profits have.

Many times a "broken stock" of an otherwise well functioning company can signal a great value. Here's a quick profile of where these companies have been in recent years, and where they may be going next.

1). Steel Dynamics traded at $20 per share in 2011, but now the stock seems stuck at $15. The company has gone in reverse while the broader stock market has soared, but investors may not want to sell just yet. This resilient, small, steel producer still pays a dividend yield of 3% and its forward P/E looks cheap, it's just a hair over 9. That low P/E going forward is due to analysts projections of a rebound in the steel industry. This year's earnings for Steel Dynamics are expected to jump nearly 20%, and analysts expect earnings to double within two years. If steel prices do rebound as analysts expect, this stock could prove to be a value at these levels.

2). Freeport-McMoRan's stock, like Steel Dynamics, has regressed even as the stock market has soared. This stock traded 50% higher just last year, but there are still signs of life. The company has been raising its dividend and now pays a ridiculous yield of 4.5%. Earnings are also expected to rise next year in double digits, but even if you go by last year's numbers of $3.22, the stock is really cheap. If earnings can just stay flat, with the stock trading below $30, it's still well below a multiple of 10.

So if things look so sunny, you're probably wondering, why is the stock so cheap?

Freeport trades in tandem with gold prices, which obviously explains (in part) why its stock has suffered so much. To some degree, this correlation is overblown as in reality Freeport only derives 15% of its business from gold. And while some investors are concerned about recent acquisitions in oil and gas, it should be noted that those acquisitions will likely make Freeport less dependent on speculative gold. In short, if this company can simply keep from going under, it could be a double from here -- just by rebounding. But it will take some time.

Cream of the crop

Moving away from metals, PotashCorp (NYSE: POT) shares many similarities with Freeport-McMoRan and Steel Dynamics. The company had been profitable every year throughout the recession. While earnings declined last year, from a record year in 2011, they've rebounded thus far in 2013 and are set to increase another 20% by 2015.

Many analysts, and Moody's, have recently issued statements that fertilizer prices will stay elevated for some time. PotashCorp simply has multiple catalysts working for it. The world has over 7 billion people to feed, and that number is rising dramatically. Further, many emerging markets such as China and India are set to drive crop prices higher as existing populations become more affluent. 

So why is the stock trading near a 52 week low? The truth is that the company is likely oversold to the downside, because it's coming off record earnings and a weak crop season. These are short-term concerns though, the outlook for long-term investors is still promising. The company trades just a shade above its 2009 highs today, and more than $25/share below 2011's highs, even though it has grown earnings over 16% annually in the past five years. It doesn't make sense. Do your own homework before you buy, naturally, but I think your long-term gains could beat the market averages with this stock.

Are cyclicals the only place to find value today?

The thing that all three of these companies really have in common is that they're very cyclical in nature. Steel Dynamics and Freeport-McMoRan fluctuate on metal prices; PotashCorp does the same on short-term crop outlooks. But with stock prices having come so far, so fast, cyclical lulls may be the only real reason for a good stock to be cheap. After all, what other than a short-term lull in product demand could explain a low valuation of an otherwise good company these days?

The thing about these stocks is that any gains will need to wait for cyclical upswings in their respective industries, which may take a while. With that said, you should not build a stock full of deep value, cyclical, stocks. But, one or two of these stocks could add a nice deep value element to a portfolio that includes fast growers, blue chips, and more.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Adem Tahiri owns shares of Freeport-McMoRan Copper & Gold. 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!

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