Yesterday I wrote about the “dead cat bounce,” the tendency of stocks that have declined rapidly to give an appearance of bottoming out, an appearance that is often deceptive. It should go without saying, though, that even if that pattern appears on a chart it doesn’t always mean that further declines will follow. Take a look below at the six month chart for Mastec Inc. (MTZ), for example.
On the surface, this has the appearance of a classic dead cat bounce. MTZ dropped over 40 percent between early April and early August. Like Aeropostale (ARO), which I talked about in yesterday’s piece, MTZ showed signs of recovery after an earnings report that is best described by the phrase “could have been worse.” This is usually a bad sign; not as bad as it could have been shouldn’t obscure the fact that something is still bad.
Making the assumption that this means that Mastec is a sell, though, indicates one of the dangers of looking at charts without considering the fundamental performance, and more importantly prospects, of a company. If you dig a little deeper into the earnings and subsequent conference call for Mastec there are a couple of things that are real positives.
As you can see, Vectorvest, whose charts and research I use, places Mastec in the telecommunications equipment industry. That is logical as that is their main business, but it is not the only thing that Mastec does. They are essentially a construction firm that builds infrastructure for the telecom industry, but also for others, most notably oil and gas. It is in this area that a nugget of information contained in the report leads me to the conclusion that MTZ could be set for a sustained run up in the coming months and may be great value at the current depressed levels.
The company announced that they had expanded their senior credit facility to $1 billion and added the capacity to borrow in Mexican Pesos. Those of you who follow energy news may have an idea why that is significant. The Mexican government has recently announced plans to open up the country’s oil and gas reserves to foreign companies in the hope of sparking an energy boom similar to that occurring in the U.S. Mastec presumably believes they are positioned to profit from the infrastructure build out that will accompany that boom.
They may or may not be able to do that, but they certainly seem to be confident; they are already building pipelines in the U.S. that run to the border with Mexico. For potential investors, though, just the prospect of all of that new business may be enough to make buying MTZ a winning trade. Rumors alone are likely to drive the stock higher, but even if those rumors don’t materialize, the company still looks undervalued.
Their core business of telecom infrastructure is cyclical by nature and a slowdown in capex by the big service providers has been mainly responsible for the declining sales and therefore the fall in the stock. Logic tells us, however that that situation may also be set to improve. The current pricing wars between the major phone companies must have a limit, after which it will be network quality, not price that becomes the focus of consumers and providers alike. In that environment, more infrastructure spending will follow.
Mastec, then, becomes a classic contrarian play. Momentum has driven the stock to a P/E of below 13.5. With no prospect of growth that is nothing special, but with two potential drivers of revenue on the horizon, MTZ looks cheap and the recent small retracement looks more like an opportunity than a dead cat bounce.