As Europe's debt crisis has flared up and growth in China has
slowed from "gangbusters" to merely "impressive" in recent months,
basic materials stocks have been hit hard. For the year, the sector
is down about 1%, according to Morningstar, lagging all other
sectors except energy. And over the past three months, basic
materials have been the flat-out worst sector, losing nearly
10%.
It's easy to understand why these stocks have been taking a
pounding. Europe's crisis has dominated headlines and led to
increased fears that euro zone woes will hurt U.S. exports and act
as a drag on growth here. Similarly, less than expected Chinese
growth has led to fears that the fast-growing Asian power won't be
needing as much steel, iron ore, and other materials from the rest
of the world as previously thought.
But while those concerns are certainly legitimate, investors
often overreact in these situations, and fear -- not fundamental
reality -- drives them to sell off good stocks. My Guru Strategies
think that's been what has happened to a lot of basic materials
stocks lately. These approaches, each of which is based on the
strategy of a different investing great, are finding a lot of value
in the sector. If the fears about Europe and China end up being
even only a bit overstated, good companies within the sector could
end up producing a lot of upside surprises, making for some nice
games for their shares. Here are a handful that my strategies think
are good candidates for such a rebound.
Curtiss-Wright Corp. (
CW
):
This New Jersey-based firm's roots go back to the very beginning of
air travel -- in fact, it is the legacy company of the Wright
brothers (and Glenn Curtiss). Its shares have no doubt been hurt
this year in part by the fact that the U.S. government -- which
faces potentially dramatic budget cuts -- is a big purchaser of
CW's flow control, motion control, and metal treatment systems and
services. But CW has been growing its non-defense businesses, with
more than 60% of its revenues in the first quarter coming from
non-defense endeavors like the sale of products used in the
commercial aircraft, oil and gas, and power generation
industries.
CW gets strong interest from the model I base on the writings of
the late, great Benjamin Graham, the man known as the "Father of
Value Investing". This stringent approach requires that a firm have
a current ratio (current assets/current liabilities) of at least
2.0, and more net current assets than long-term debt. CW delivers
on both fronts, with a 2.4 current ratio, and $571 million in
long-term debt vs. $728 million in net current assets. It's also
selling at a good price: Its P/E (using three-year average
earnings, which Graham did) is 13.3, and its price/book ratio is
1.14.
Cliffs Natural Resources Inc. (
CLF
):
This Cleveland-based mining company is a major global iron ore
producer and a significant producer of high- and low-volatile
metallurgical coal. It has mines in North America and Australia,
and a market cap of about $7 billion.
Cliffs has been hit hard since I wrote about it late last year,
thanks in large part to the China slowdown. But boy is it cheap,
trading for just 4.5 times trailing 12-month EPS and about 6 times
projected 2012 EPS. It's a favorite of the model I base on the
writings of mutual fund legend Peter Lynch. Lynch famously used the
P/E-to-Growth ratio to find bargain-priced growth stocks, and when
we divide Cliffs' trailing P/E ratio by its 38.3% long-term growth
rate (I use an average of the three-, four-, and five-year growth
rates to determine a long-term rate), we get a P/E/G of just 0.12.
That easily falls into this model's best-case category (below 0.5).
Even if that growth rate slows to one-third its current level,
Cliffs is so cheap that its P/E/G would still come in under the
model's 1.0 upper limit.
The Lynch model also likes that Cliffs isn't loaded down with
debt -- its debt/equity ratio is under 60%.
Potash Corporation of Saskatchewan (
POT
):
This Canada-based firm ($39 billion market cap) is the world's
largest fertilizer company, responsible for about 20% of global
potash capacity. PotashCorp, which has a 24.6% long-term growth
rate, is another favorite of my Lynch-based model. It trades for
13.9 times trailing 12-month earnings, which makes for a solid 0.57
P/E/G ratio. Its inventory/sales ratio has also been declining
slightly, which the Lynch model likes to see, since a rising
inventory/sales ratio indicates a company's products aren't in
demand. And PotashCorp's debt/equity ratio is about 56%, far from
excessive.
BASF SE (
BASFY
):
Based in Germany, this global chemical giant ($65 billion market
cap) is active all over the world. Its offerings include chemicals,
plastics, performance products, crop protection products, and oil
and gas products.
BASF shares have bit hit quite hard over the past few months,
and when you look at the breakdown of its revenues, you understand
why. The firm gets about 56% of its revenues from Europe (about
three-quarters of that is from Germany), and another 18% from the
Asia/Pacific region, so its business sits right near the heart of
the global economic fears. But the firm is in solid financial
position -- long-term debt is less than net current assets -- and
two of my models think it's a bargain. My Lynch-based approach
likes its 19.6% long-term EPS growth rate and 0.39 yield-adjusted
P/E/G ratio (Lynch added dividend yield to the "G" portion of the
P/E/G ratio for large dividend-payers like BASF). My James
O'Shaughnessy-based value model likes the stock's size, $12.73 in
cash flow per share, and solid 4.6% dividend yield.
BHP Billiton Plc (
BBL
):
London-based Billiton is a natural resources firm that has more
than 100 locations across the globe. It is one of the world's
largest producers of major commodities such as aluminium, copper,
coal, iron ore, nickel, silver and titanium minerals, and uranium,
and also has substantial interests in oil and gas. (Note: BHP
Billiton is a dual-listed company that also trades under the symbol
BHP; my models are a bit more interested in the BBL listing right
now.)
Both my Lynch- and O'Shaughnessy-based models like BBL. My
O'Shaughnessy value model likes its size ($167 billion market cap),
$10.16 in cash flow per share (which is more than seven times the
market mean), and solid 3.8% dividend yield. My Lynch-based model
likes its 17.5% long-term EPS growth rate and yield-adjusted P/E/G
of 0.32. It also has manageable debt, with a debt/equity ratio
below 40%, another reason the Lynch model likes it.
I'm long BBL and CW.