The recent turmoil in the market has put some quality stocks on sale. Below I've outlined four that I believe are deeply undervalued at the time of writing. My analysis includes a REIT, a gold exploration company, an agricultural chemical producer and a chip maker.
Annaly Mortgage (NLY) – NLY continues to have the wind at its back. The mortgage REIT that invests in mortgage backed securities with borrowed funds has benefited from two strong trends in the markets lately: 1) falling bond yields (rising prices), and 2) the short-term interest rate policy of the Federal Reserve. The Fed has kept short-term interest rates low to help spur economic growth. The Fed recently announced that this current interest rate policy will remain in effect at least until 2012. The reason behind this is the sluggish U.S. economy and a lack of new job growth. Lowering interest rates is one of the Fed’s primary tools used to spur the economy, but is rarely used for such a long period of time. It was widely anticipated by economists that the economy would start to show a resumption of growth by now, and rates would be thus be heading higher. However, the slow growth has kept the Fed’s policy in place, and with it continued the rally in the bond market, as investors have re-allocated back to fixed income and away from equities as the economy flirts with recession.
NLY has benefited from the lower cost of capital (short-term borrowing), as well as the continued appreciation of its mortgage backed securities holdings. NLY’s extremely high dividend of over 14% reflects the leverage it uses to magnify the spread between its cost of borrowing and MBS portfolio. While attractive, this perfect scenario will end when the economy eventually starts to grow, the Fed starts to raise interest rates, and the fixed income markets adjust accordingly in a downward fashion. If already invested, I would watch NLY closely for any signs of sustained economic growth, and would recommend that new investors avoid it as the current economic environment is not likely to last much longer.
Jet Gold Corporation [JAUGF.PK] - Jet Gold Corporation is a Canadian resource exploration company active in precious metals mining in British Columbia. It has a market capital of $5.54 million. It has traded around $0.33 per share within a 52-week range of $0.03 – $0.40. Its return on equity was -90.35%, and return on assets was -45.96%. It has also generated a negative net income on average of -$447.25 thousand during a 12-month period. The price-book value is 4.68 times. The share price of Jet Gold Corporation ultimately depends on the price of gold. While the precious metal appears temporarily overbought, we believe there is longer term upside potential for this junior gold miner. This could be a stellar speculative play if gold can continue its "cheap money" induced run.
Monsanto Company (MON) – MON’s dividend yield is 1.8 percent, its price to earnings ratio is 23, and earnings per share are $2.87. It is a highly profitable company, as indicated by its gross margin of 51.75 percent, and it is well managed, with return on equity of 14.11 percent. Its debt to equity ratio is 18.5. Recent headlines have focused on the agri-giant’s battles to maintain seed, herbicide and pesticide market share. The industry's watchdogs have focused on Monsanto's herbicide, Round-Up, having been found in lakes and streams throughout two U.S. agricultural states. There is also concern over the rise of “super weeds” that are resistant to glyphosate, Round-Up’s active ingredient. The Zack’s Analyst Blog reviews competitor Dow Chemical’s (DOW) plans to replace MON’s Round-Up-resistant crop seeds. Zack’s still rates Monsanto as “Outperform” in the long-term and “Buy” in the short-term. A Seeking Alpha article notes that the venerable Thornburg Value Fund sold its entire stake in the company. I think the key to Monsanto's growth is in its research and development. It would be well-served to promote its seminal biofuel and high-yield cash crop intellectual property development.
Intel Corp (INTC): Intel is the world’s largest semiconductor chip manufacturer, based on revenue. The company also develops computing platforms. In the first quarter of 2011, Intel acquired the Wireless Solutions business of Infineon Technologies AG, a provider of cellular phone technology, to complement its existing communication portfolio.
With a market cap of $105.44 billion, this company is far larger than competitors like Texas Instruments (TXN) - which has a market cap of $29.91 billion, and Advanced Micro Devices, Inc. (AMD) - with a market cap of 4.67 billion.
Intel’s P/E of 9.22 is slightly better than Texas Instruments’ 9.97, and much better than the industry average at 12.50. In addition, Intel’s second quarter 2011 revenues of $13.1 billion are up 22% year-over-year, and it has seen rising revenues for the past five consecutive quarters.
The stock’s expected five year PEG ratio of .75 is far better than Texas Instrument’s 1.04. This is an indication that Intel is positioned for steady, if not significant growth. Additionally, Intel’s annual dividend yield, currently 4.3%, has risen consistently. In fact, dividends have more than doubled since 2005, making Intel a good pick for dividend-seeking investors. This is one to add to the retirement portfolio watchlist.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.