The ugly budget fight and the fallout from the lack of a meaningful debt reduction plan once again took a heavy toll on the markets last week. The basic materials sector SPDR Fund (XLB) plunged 9.7% last week, on the back of a 4.9% drop the prior week, and it was down an additional 7.3% on Monday.
Of the approximately 700 stocks in the basic materials sector, 27 stocks trading above $1 at closing on Friday, August 5, went down more than 15% during the week and none went up more than 15% during the week (see table). The fall in the basic materials sector index mirrored the overall weakness in the broader markets as the indices plunged 7%-8% last week on the back of a 4% dive the prior week, and they fell an additional 6.6% on Monday.
As an investor, it is imperative to keep a cool head, especially in such turbulent times, and keep scouting for new opportunities while keeping an eye on both the price movements and news flow. Our daily and weekly coverage analyzing the top movers for top buy and sell ideas is aimed at enabling you in that effort. You can access the rest of our daily, weekly and quarterly mover series from our author page.
This article covers our analysis of the top movers in the basic materials sector last week. Of the 27 stocks that moved more than 15% up or down last week, we analyzed them to determine if they would continue in the same direction, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis:
Buy Patriot Coal Corp. (PCX): PCX is a leading coal exploration and production company in the Eastern United States, with 14 active mining operations in Appalachia and the Illinois Basin. Its customers include electric utilities, industrial users and metallurgical coal customers, and it controls approximately 1.9 billion tons of proven and probable coal reserves. Its shares plunged 24.9% last week, followed by a 14.4% drop on Monday. The company missed consensus analyst estimates when it reported June quarter results two weeks ago on July 26, and projected that losses would continue into the current September quarter before it becomes profitable in the December quarter. Its shares have been weak ever since, dropping an astounding 50% after the report.
We believe that the plunge in its share price is exaggerated, driven in part by the weak market and in part by a rash of disappointing earnings reports from its peers in the coal mining group. At a forward 6-7 P/E, PCX shares are currently undervalued as it is projected to go from losing 53 cents in 2010 to earning $1.58 in 2012. Furthermore, the coal industry is at the beginning of a long-term super-cycle, driven by economic growth in China and India. This is likely to lead to a tight market, and higher prices and profits for coal companies such as PCX that also operate in the metallurgical coal business. PCX shares are approaching long-term support levels in the $10-$12 range, and with the shares currently in a free fall, we would be buy it here in stages to take advantage of any further weakness in price.
Buy Huntsman Corp. (HUN): HUN is among the world’s largest global manufacturers of differentiated organic and inorganic chemical products, marketed for consumer applications and a variety of industrial applications, including adhesives, aerospace, automotive, construction, consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Its shares plunged 33.5% last week, followed by another 11.7% drop on Monday.
HUN reported its June quarter report on Thursday morning before the market open, in which it missed estimates by a penny (48 cents versus 49 cents) and beat revenue estimates ($2.93 billion versus $2.77 billion). While this appears minor, consider that in the prior three quarters, HUN beat earnings by 13 cents, 4 cents and 23 cents, so the expectation built-in was probably a strong 10 cents-15 cents beat, and the company fell well short of that, leading to the steep decline which was exacerbated by the weak tape. At Monday’s closing price of $11.21, HUN traded at a forward 5 P/E, at the bottom of its historical P/E range, while the earnings trajectory is bullish going forward, from 83 cents in 2010 to $2.26 in 2012 at a compounded growth rate of 65%. HUN shares sell at a steep discount to their projected growth going forward, so we would be buyers here, buying in stages to take advantage of any further weakness in the shares.
Buy Arch Coal Inc. (ACI): ACI is one of the largest coal producers in the U.S., engaged in the production of steam and metallurgical coal from surface and underground mines. Its shares dropped 16.8% last week, followed by an additional 14.8% drop on Monday. The company reported a disappointing June quarter report on July 29 in the middle of a bad tape, in which it missed earnings (44 cents versus 60 cents) and beat on revenues ($985 million versus $957 million), and it lowered FY 2011 earnings to $1.75-$2.15 versus the $2.38 consensus estimate. At Monday’s closing price of $18.14, ACI traded at a forward 4-5 P/E, while earnings are projected to surge at 83% compounded growth rate from $1.14 in 2010 to $3.81 in 2012, driven by a long-term super-cycle in coal due to economic growth in the U.S. and India. Meanwhile, shares are at long-term support levels in $16-$18 range. We would be buyers here on the dip, buying in stages to take advantage of any further weakness in price.
North American Palladium (PAL): PAL is a Canadian company engaged in the production of palladium and other base metals in two mines in Ontario and Quebec, Canada. Its shares fell 15.5% last week, followed by a 16.9% drop on Monday. There was no company-specific news to account for the decline. At Monday’s closing price of $2.94, PAL traded at a forward 10-11 P/E, while it is projected to go from a 16 cent loss in 2010 to earning 28 cents in 2012. Furthermore, analysts have a mean target of $4.80, and of the four analysts who currently cover the company, two rate it at buy, one at hold, and one at underperform.
Buy Alpha Natural Resources (ANR): ANR is a leading Central Appalachian coal producer that also has significant operations in Northern Appalachia. It is the world's third largest metallurgical coal producer, and its reserves primarily consist of high Btu, low sulfur steam coal and metallurgical coal. It traded down 24.4% last week, followed by an additional 18.5% plunge on Monday.
ANR reported a disappointing June quarter report last Thursday before market open, in which it missed earnings by a wide margin (96 cets versus $1.13) and beat revenue estimates ($1.59 billion versus $1.54 billion). However, at Monday’s $26.34 closing price, ANR shares trade at a forward 5 P/E, while earnings are projected to explode from $2.17 in 2010 to $5.22 in 2012 at a 55% compounded growth rate. Furthermore, with the acquisition of Massey, ANR now controls the largest domestic metallurgical reserves. Also, shares are approaching long-term support levels in the $24 range, and are a good buy at these levels. We would buy in stages to take advantage of any further weakness in price, given that shares are currently in a free fall.
Peabody Energy Corp. (BTU): BTU is the largest private-sector coal company, and provides 2% of the worldwide and 10% of U.S. electricity. It is engaged in coal production and sale through 28 operations in the U.S. and Australia. Its shares fell 18.4% last week, and were down an additional 10.5% on Monday. There was no company-specific news to account for the decline in the past week. At Monday’s closing price of $41.96, BTU traded at a forward 7 P/E, at the bottom of its historical P/E range, while earnings are projected to increase from $3.09 in 2010 to $5.87 in 2012 at a compounded 37% growth rate. Analysts are generally bullish on the company and have a mean target of $75. And of the 22 analysts that cover the company, 17 rate it at buy/strong buy, four rate it at hold, and one rated it at underperform.
Consol Energy Inc. (CNX): CNX is a producer of bituminous coal and coal-bed methane gas primarily in the northern and central Appalachian and Illinois basins. Its shares traded down 22.4% last week, followed by a 11.2% drop on Monday. At Monday’s closing price of $36.93, CNX traded at a forward 8-9 P/E, while earnings are projected to rise at a 38% compounded growth rate from $2.22 in 2010 to a projected $4.34 in 2012. Analysts are generally bullish on the company and have a mean target of $64. Of the 27 analysts that cover the company, 21 rate it at buy/strong buy and six rate it at hold.
Table
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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our "opinions" and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial advisor before making an investment decision. Investing includes certain risks including loss of principal.
