I have been bullish on basic materials stocks for a while now. I am constantly looking for opportunities in the market. The basic materials sector was in the dog house for the first half of 2012, yet has been quietly pushing higher as of late. The gloomy global growth outlook perpetrated by Europe, China and the U.S. wreaked havoc on many basic materials stocks for most of the past few years. Nevertheless, conjecture regarding global growth is improving which has sparked a stealth rally in the sector. The sector has been progressing upward after hitting a low post election. See chart below of the Materials Select Sector SPDR (NYSEARCA:XLB) provided by Finviz.com.
One major catalyst for the sector is China's improving growth prospects. Alcoa (NYSE:AA) stated on its recent earnings conference call that the outlook for Chinese growth is much improved. Furthermore, global growth bellwether Danaher Corp. (NYSE:DHR) predicts higher than expected core revenue growth. The "strong finish to the year" was "broad-based across most of our businesses," said CEO Lawrence Culp.
I posit this news coupled with the quantitative easing and stimulus actions taken by the Fed, ECB and many other central banks around the globe will underpin basic materials stocks in 2013.
In the following sections we will perform a review of the fundamental and technical state of each company to determine if we should stay with the position, sell out or simply manage the position by taking profits. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
Alpha Natural Resources, Inc. (ANR)
ANR is trading 58% below its 52-week high and has 12% upside potential based on the consensus mean target price of $11.07 for the company. ANR was trading Wednesday for $9.88, down almost 4% for the day.
Fundamentally, ANR has some positives. EPS for the next five years is expected to rise by 20%. ANR is trading for approximately a 55% discount to book value. On the negative side, the company has a net profit margin of -41%; a negative ROE of -45.70% and EPS is dropping substantially quarter over quarter.
Technically, ANR looks strong. The company has been in a solid uptrend since September. Alpha is on the comeback trail and is up 53% for the last quarter. Alpha has a beta of 1.73. The stock has breached major long-term resistance at the $9 mark.
The risk/reward ratio seems favorable at this point. The company is down over thirteen fold from its 2008 high of $100. Alpha recently reported narrowed losses and posted much better earnings than were expected for the third quarter. The company is doing a great job of cutting costs and rightsizing production based on the current demand. I like it here.
Peabody Energy Corp. (BTU)
Peabody is trading 32% below its 52-week high and has 24% upside potential based on the consensus mean target price of $32.61 for the company. Peabody was trading Wednesday for $26.33, down nearly 2% for the day.
Fundamentally, Peabody has some positives. The company has a PEG ratio of .61. Peabody is trading for 11.66 times free cash flow and 20% over book value. EPS for the next five years is expected to rise by 15%. The company pays a dividend with a yield of 1.27%.
Technically, the stock looks good. The stock changed trend in August and is now in an uptrend. BTU recently achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma. I like the stock here testing the bottom of the uptrend line.
The company is down almost three-fold from its 2008 high of $82. The recent rise in natural gas prices bodes well for the coal sector. If global growth picks up like most are expecting, the stock should do well in 2013.
Cliffs Natural Resources Inc. (CLF)
The company is trading 50% below its 52-week high and has 19% upside potential based on the consensus mean target price of $44.63 for the company. Cliffs was trading Wednesday for $37.45, down almost 2% for the day.
Fundamentally, Cliffs has several positives. Cliffs pays a dividend with a yield of 6.58%. The company has a forward P/E of 12.80. Cliffs is trading for a 15% 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 is in a long-term downtrend yet recently found a bottom at the start of December. The stock has bounced back nicely since testing the top of the down trend channel.
Spot iron ore prices have risen recently to their highest level since July, underpinned by buying from China. This bodes well for Cliffs and other global basic materials players. The risk/reward at that level seems favorable. I like the stock here, but would wait for a slight pullback to get in.
Freeport-McMoRan Copper & Gold Inc. (FCX)
The company is trading 27% below its 52-week high and has 18% upside potential based on the consensus mean target price of $44.63 for the company. Freeport was trading Wednesday for $35.09, up slightly for the day.
Fundamentally, Freeport has several positives. Freeport pays a dividend yielding 3.57%. The company has a forward P/E of 7.60. Freeport is trading for two times book value. EPS next year is expected to rise by 42%. The company has a net profit margin of 22.08% and an ROE of 18%.
Technically, Freeport was in a well-defined uptrend from mid-June until December when the company announced a couple of major acquisitions. The stock dropped like a rock to $30 and has been slowly climbing higher since.
I feel the backlash by Freeport's shareholders over the $20 billion buyout deals was overdone. The stock is a buying opportunity here after bouncing off support at $30. This is an ideal time to start a long-term position in Freeport.
United States Steel Corp. (X)
The company is trading 22% below its 52-week high and has 4% potential upside based on the analysts' consensus mean target price of $26.30 for the company. US Steel was trading Wednesday for $25.43, up almost 2% for the day.
Fundamentally, US Steel has some positives. The company has a forward P/E of 16.67. EPS is up 87% quarter over quarter. US Steel is trading for 93% of book value. EPS next year is expected to rise by 77%. The company pays a dividend of around 1%.
Technically, the stock has been in a well-defined uptrend for several months. The stock just achieved the coveted golden cross. The stock looks poised to break out in the coming months.
The company is down almost substantially from its 2008 high of $180. I see this as a chance to get into the stock before things start to really turn around. With the stock hitting the golden cross this week, now is the time to buy.
The Bottom Line
A vast sell-off of the basic materials sector based on unprecedented macroeconomic and geopolitical global growth anxieties has occurred over the last four years. This has created some tremendous buying opportunities in the space. A stealth rally has been going on in the sector since June, yet there is still a tremendous amount of potential upside. I posit the stocks covered in this article have not priced in the growth we are about to experience. These stocks still have much more room to run with expectations at all-time lows.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.