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The market is so schizophrenic of late that it is hard to make buy decisions about any stocks, even sound stocks. Today’s big negative event was a downgrade of Japanese debt one notch by Moody’s to Aa3. Moody’s again cited bulging debt as a reason for the downgrade (shades of Europe). In a more positive vein Moody’s did say the outlook for Japan was now stable. Currently the S&P500 futures are down. The New Home Sales figures miss didn’t help either. After these data, it is hard to say exactly how the markets will behave tomorrow, Wed. Aug. 24, 2011. Before the downgrade a near term bottom had been a better than even bet. It may still be. Dick Bove’s buy call on U.S. banks’ stocks today seems likely to help. We have to wait to see tomorrow.

An Associated Press survey of leading economists did find that a U.S. recession is unlikely in the next 12 months, but continued weakness in the economy is likely. Perhaps this will be enough to steady the market.

Regardless, many stocks have sold off enough to more than reflect the likelihood of a coming recession. If we are unlikely to have another U.S. recession soon, many stocks will eventually go up. Many think that emerging market growth will take up the slack in a slight U.S. recession. If you think longer term, you can start to leg in on some of the bargains, especially if those bargains sell internationally.

One of the biggest bargains in the market is Cliffs Natural Resources Inc. (NYSE:CLF). This company mines iron ore, coking coal, some thermal coal, and chromite. It has suffered as the market has fallen and the prices of scrap steel have fallen slightly in August. I note they are still very close to July prices. CLF is now trading at an FPE of 4.79, and that is after some near term earnings estimate cuts by analysts. Since the analysts earnings estimates for FY2012 are still rising, it seems likely that the recent stock price crash will correct upward soon. Revenue rose 52% year over year in the latest quarter, but CLF missed slightly on earnings due to increased costs of inputs. With the fall of oil prices recently, some of those extra costs will diminish for Q3 and Q4.

Other factors have conspired to ensure that iron ore prices will remain high.Iron ore exports from India are likely to decline by 28% this year on falling domestic production due to mine closures across the country. Plus weather related production cutbacks, labor shortages, infrastructure bottlenecks, and worker strikes in Africa have limited output of iron ore, copper, and coal. This means tightening supply and firm if not higher prices for the medium and long term. The steel prices on the LME would tend to substantiate this. The LME cash price chart of steel prices for the last year show a strong uptrend. See below.


(Click to enlarge)

The above macro fundamentals mean well managed CLF should do well for the rest of the year and longer. Since CLF is classified as a “steel” company even though it is mostly a materials provider for steel makers, I have put it in this article. Vale (NYSE:VALE), the largest iron ore producer in the world, should show similar performance to the above conditions as CLF.

Two more categorically normal specialty steels -- Allegheny Technologies Inc. (NYSE:ATI) and Reliance Steel & Aluminum Co. (NYSE:RS) -- will benefit from the above factors. They will further benefit from the recent greater health of both the airline industry and the auto industry. Airbus’ July bookings brought Airbus 2011 net orders to 785, This raised its overall backlog to 4039 aircraft -- Airbus’ highest total ever. Boeing is far behind Airbus for 2011 with 268 airplane orders so far. However, it too has a big backlog of orders with 830 for the 787 alone.

The auto industry, after the recent estimate cut by J.D. Power & Associates, is expected to sell 12.6 million autos in the U.S. in 2011. This is still considerably better than the 11.8 million sold in the U.S. in 2010. Plus the automakers are trying to make their autos lighter to get more fuel efficiency. This means more specialty steels and steel and aluminum alloys. The above should mean more sales for specialty metals producers.

The table below contains some of the microeconomic fundamental data for the above mentioned four stocks: CLF, VALE, ATI, and RS. The data are from TDameritrade and Yahoo Finance.

Stock

CLF

VALE

ATI

RS

Price

$72.53

$26.49

$45.13

$38.01

1 yr. Analysts’ Target Price

$126.00

$41.62

$76.13

$66.63

Predicted % Gain

74%

57%

69%

75%

PE

6.58

5.36

32.89

10.20

FPE

4.79

5.35

9.94

6.53

Avg. Analysts’ Opinion

1.9

2.0

2.0

2.0

Miss or Beat Amount For Last Quarter

-$0.79

-$0.19

-$0.02

$0.00

EPS % Growth Estimate for 2011

79.20%

61.00%

235.40%

78.60%

EPS % Growth Estimate for 2012

12.80%

-4.80%

65.10%

24.40%

5 yr. EPS Growth Estimate per annum

19.63%

4.04%

48.10%

16.95%

Market Cap

$10.59B

$138.23B

$4.80B

$2.85B

Enterprise Value

$14.59B

$146.65B

$6.08B

$3.78B

Beta

2.54

1.49

1.72

1.50

Total Cash per share (mrq)

$1.63

$2.66

$3.46

$1.23

Price/Book

1.79

1.57

1.69

0.91

Price/Cash Flow

5.42

4.79

15.29

6.74

Short Interest as a % of Float

3.21%

0.81%

5.83%

1.65%

Total Debt/Total Capital (mrq)

37.79%

22.62%

37.26%

26.85%

Quick Ratio (mrq)

0.78

1.69

1.23

1.56

Interest Coverage (mrq)

21.88

--

5.22

10.68

Return on Equity (ttm)

35.41%

34.59%

5.76%

9.72%

EPS Growth (mrq)

52.30%

75.19%

64.54%

58.88%

EPS Growth (ttm)

194.03%

195.06%

34.64%

14.97%

Revenue Growth (mrq)

52.48%

55.20%

28.48%

26.47%

Revenue Growth (ttm)

69.44%

95.33%

34.94%

28.78%

Annual Dividend Rate

$1.12

$1.09

$0.72

$0.48

Gross Profit Margin (ttm)

39.73%

60.77%

13.81%

25.10%

Operating Profit Margin (ttm)

33.73%

53.67%

6.48%

6.76%

Net Profit Margin (ttm)

26.58%

41.91%

3.11%

3.94%

The above stocks all look like good longer term investments. The iron ore and coal producers -- CLF and VALE -- have great Return on Equity and great Net Profit Margins. They should be relatively safer in downturns. ATI has by far the greatest 5 year EPS Growth Estimate per annum at 48.10%. I should add that ATI recently concluded a new union contract for two of its plants. This should alleviate some worries about ATI. This might turn out to be the best long term investment. RS is just a good solid performer for which analysts are predicting 75% one year price growth performance.

The two year charts may give us some technical directions.

The two year chart of CLF is below:


(Click to enlarge)

The two year chart of VALE is below:


(Click to enlarge)

The two year chart of ATI is below:


(Click to enlarge)

The two year chart of RS is below:


(Click to enlarge)

The Slow Stochastic sub chart of each of the above stocks shows each of the stocks is oversold or nearly oversold. Each main chart looks like each stock is likely to have a snap back rally soon. If you add these technicals to the fundamentals above, playing a snap back rally in these stocks makes sense. If you want to think only long term, all of these stocks seem likely to have great potential for gains from this dip. I particularly like CLF and ATI. They have the strongest charts (and good fundamentals too). If the market opens lower tomorrow, it may be a good strategy to start to leg into these stocks. A rise could ensue from there. If you want to be safer you could wait until Thursday after the Initial Claims number comes out.

Good Luck Trading.

Source: Specialty Steels Hit By Higher Input Costs And The Market Downturn Are Ready To Bounce