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The Gist

The market is locked in a tight trading range due to apprehension that Washington will pull a Thelma and Louise and drive the U.S. economy over the fiscal cliff. According to the Congressional Budget Office, the U.S. would slide into recession next year and unemployment would rapidly increase without a compromise on the fiscal cliff.

On the other hand, it sounds like an excellent buying opportunity. The politicians have a method to their madness that resembles an old fashioned game of chicken. Both sides will hold out till the last minute in hopes of improving their position. Then at the last moment they will come together and make a deal saving the day and giving them the opportunity to play the hero as they announce the agreement.

I posit there is no way either side will allow the U.S. to fall off the fiscal cliff, yet there are many who are not so sure. This may provide an opportunity to buy stocks in solid companies with strong catalysts for future growth. The following are five stocks I feel have significant upside potential in the coming years that are selling at a discount currently.

The Goods

The stocks selected are basic materials stocks related to the metals industry. With the recent uptick in global growth forecasts and the Fed and other central banks around the global firmly entrenched in quantitative easing and stimulus programs, I see this as a major buying opportunity.

The stocks are trading on average 29% below their 52-week highs and have 33% upside potential based on analysts' 12 month price targets. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities. Additionally, these stocks are unvalued based on their PEG ratio, price to book ratio or other fundamental characteristics.

In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to buy. The following table depicts summary statistics and Thursday's performance for the stocks. The following charts are provided by Finviz.com.

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Alcoa, Inc. (AA)

The company is trading 22% below its 52-week high and has 24% potential upside based on the consensus mean target price of $10.41 for the company. Alcoa was trading Thursday for $8.42, up slightly for the day.

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Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.35. Alcoa is trading for 66% of book value. The company pays a dividend with a yield of 1.43%. Alcoa's projected EPS growth rate for next year is 162%.

Technically, the stock has broken through all support levels and is currently trading 6% below the 50-day sma which is bearish. On the other hand, the risk/reward may favor long trades at this point with the stock testing the lows for the year at the $8 mark and bouncing higher. If you are a long-term investor, this could be a chance to pick up Alcoa at its lows. The stock bounced off $8.00 in July and had a significant run to nearly $10.

Cliffs Natural Resources Inc. (CLF)

The company is trading 61% below its 52-week high and has 64% upside potential based on the consensus mean target price of $47.88 for the company. Cliffs was trading Thursday for $28.90, down over 2% for the day following a recent downgrade from Goldman Sachs.

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Fundamentally, Cliffs has several positives. Cliffs pays a dividend with a yield of 8.44%. The company has a forward P/E of 8.13. Cliffs is trading for a 33% discount to book value. EPS is up over 50% this year. The company has a net profit margin of 16.28% and the current ROE is 15%.

Technically, Cliffs looks markedly over sold with an RSI of 26 and is the definition of a falling knife. The stock recently took a serious nose dive after missing earnings. Cliffs reported third-quarter results that missed analysts' estimates as the price of steel making raw-materials dropped. Then Tuesday the stock took another dive based on the recent downgrade.

Goldman Sachs downgraded Cliffs shares to Sell with a $25 price target down from $33. There are rumors of Cliffs being a potential takeover target. Nonetheless, I don't buy stocks based on take out rumors. I say use the $25 price target set by Goldman as your entry point due to the risk of another leg down on a potential dividend cut cited by BMO capital Friday. The risk/reward at that level seems favorable at that level.

CONSOL Energy Inc. (CNX)

CONSOL is trading 23% below its 52 week high and has 26% upside based on the analysts' consensus mean target price of $40.00 for the company. CONSOL was trading Thursday at $31.95, flat for the day.

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CONSOL has many fundamental positives. The company has a PEG ratio of .63 but a forward PE of 25.78. CONSOL pays a dividend with a 1.56% yield with a payout ratio of 26%. On the downside, the company is trading for more than two times book value.

Technically, the stock is performing well. It has been in a well-defined uptrend since June. The stock took a major leg down after the election and is now trading just above the 200-day sma. This is precisely the time to start a position in the stock. It is hugging the bottom of the uptrend channel. 5 times over the last year the stock has rebounded nicely from this point. I would layer into the stock 10% at a time using weekly intervals to reduce risk.

Nucor Corporation (NUE)

Nucor is trading 8% below its 52 week high and has 12% upside based on the analysts' consensus mean target price of $46.07 for the company. Nucor was trading Thursday at $41.04, up almost 1% for the day.

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Nucor has many fundamental positives. The company has a forward PE of 13.67 which is below industry average. The company is trading for 1.6 times book value. Nucor pays a dividend with a 3.58% yield. EPS next year is expected to rise by 77%.

Technically, the stock is performing well. It has been in a well-defined uptrend since May and recently broke above long-term resistance at the 50-day sma. The stock is resting in the middle of the current uptrend channel.

Credit Suisse recently stated U.S. steel sector stock valuations are pricing in the "fiscal cliff" uncertainty and posits a buying opportunity exists in the sector over the next 3-6 months as demand and pricing improve. The firm reiterated an Outperform on Nucor. I agree. I like the stock at this level.

United States Steel Corp. (X)

The company is trading 32% below its 52-week high and has 21% potential upside based on the analysts' consensus mean target price of $26.48 for the company. US Steel was trading Friday for $21.78, up slightly for the day.

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Fundamentally, US Steel has some positives. The company has a forward P/E of 12.57. US Steel is trading for 81% of book value. EPS next year is expected to rise by 105%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.

Technically, the stock looks poised to break out in the coming months. The stock tested resistance at the bottom of the slight uptrend channel four times over the past few months and recently broke through resistance at the 50-day sma.

The company is taking the proper steps to right size operations as shown by its recent talks to sell its Slovak unit. You have to buy low to sell high. The risk/reward looks favorable for US Steel at this level.

The Bottom Line

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. - Wayne Gretzky

This is a great quote from Gretzky. I believe it pertains to the current situation for these basic materials stocks. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most likely end up on the wrong side of the trade. These stocks are currently out of favor. The market began to drop precipitously throughout November as investors took profits and stepped to the sidelines as the looming fiscal cliff approaches.

Nevertheless, I see the sell off as a buying opportunity. The market always bounces back. This is a buy on the dip scenario. Let's not forget, the world's central banks have been taking action and the Bernanke put is firmly in place.

Source: 5 Undervalued Basic Materials Stocks To Buy For The Next 4 Years

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.