Warren Buffett advises investors to invest at the point of maximum pessimism. These are the times when stocks are often mispriced due to a temporary setback or problem. I have screened five cheap stocks that offer a good risk-reward profile for investors. Specifically, these five have compelling valuations on a price to earnings basis, they offer generous payouts through dividends, and they have an international footprint that provides a natural currency hedge. This is my analysis of the stocks that meet that criteria:
Vale S.A. (NYSE:VALE)
Vale is a Brazil-based mining and metals company. It is also the world’s largest producer of iron ores and the second largest mining company. Its shares have fallen by 35.81% for the year. Investors are worried about a possible slowdown in China’s economic growth. This will result in lower iron ore shipments for the company. However, the long term economics of iron ore appears bright. The latest comments from Vale’s Chief Executive Officer, Eduardo Bartolome, suggest that there is long term demand for high quality iron ore. Management is also confident that there is no hard landing in the China’s economy.
The recent valuation implies that the market may be mispricing Vale. It currently trades at 4.83 times next year’s earnings and has a dividend yield of 2%. Similar international mining companies like Rio Tinto Plc (NYSE:RIO) and BHP Billiton Plc (NYSE:BHP) also trade at depressed levels. Rio Tinto is valued at 4.58 times and carries a dividend yield of 2.40%. Meanwhile, BHP Billiton trades higher at 7 times earnings and has a dividend yield of 3.30%. I believe that the medium term catalyst for Vale is China’s booming infrastructure and housing sector. Once the market changes its view about China, shares of Vale could easily double from current price levels.
A.F.P. Provida SA (NYSE:PVD)
Provida is a dominant player in the Chilean private pension fund administration space. The company works like an asset management company without the risk of client redemptions. Chile has mandated every worker to allot a portion of their monthly income to their retirement fund. Pension fund administrators like Provida get a fixed percentage for each monthly contribution. For the year, the stock has declined by 30%. The performance is in line with other South American stocks.
The macroeconomic picture of Chile appears rosy. It is one of the most prosperous and stable nations in South America. Strong economic development translates to higher paychecks over time. Higher paychecks would mean higher fees for Provida. At present, the market is not yet convinced of the future prospects of Provida. It trades at 7 times earnings and has a dividend yield of 6.50%.
In contrast, asset managers in the United States are valued higher. Legg Mason (NYSE:LM) has a price earnings ratio of 14 times and Alliance Bernstein (NYSE:AB) trades at 10.43 times. The dividend yield of Provida alone makes it a good investment candidate. Its business model is somewhat defensive in nature and it has strong balance sheet. Thus, the margin of safety of Provida is higher than most asset management stocks.
Hess Corp. (NYSE:HES)
Hess is an integrated energy company. The company has exploration and production, as well as marketing and refinery. Its exploration activities are spread throughout the globe. With oil prices trading below $90 per barrel, investors have dumped oil stocks indiscriminately. This creates a compelling opportunity for long term investors. For the year, shares of Hess have fallen by 30%. Despite low oil prices, analysts are expecting HES to post earnings per share of $7.45 next year. This a modest increase of 7% compared to prior year’s results.
The stock currently trades at 6.97 times next year’s earnings. It also has a dividend yield of 0.80%. This is lower than other energy stocks. Chevron Corp. (NYSE:CVX) is valued at 7 times earnings and has a dividend yield of 3.40%. Meanwhile, mega-cap energy stock Exxon Mobil Corp. (NYSE:XOM) trades at 8.33 times earnings and carries a 2.60% dividend yield. Hess CEO, John Hess, believes that oil demand remains intact. He said that demand from industrialized nations has slightly declined but demand from emerging markets has been steadily increasing. Research firms also believe that oil prices should trade above $100 per barrel based on supply and demand dynamics.
Freeport-McMoran Copper & Gold Inc. (NYSE:FCX)
Freeport is one of the world’s largest producers of copper and gold. Its mining operations are concentrated in Indonesia, North and South Americas and Congo. The major driver of the company’s revenue is copper. Its biggest mine is an open pit mine in Papua, Indonesia. For the year, shares of FCX have fallen by 42%. This mirrors the performance of copper prices. The current price of copper implies that near term demand for copper will be lower. However, its long term demand remains intact. The supply of copper is currently lagging demand. This is a favorable situation for copper miners.
t appears that FCX is undervalued relative to its future prospects. It is currently trading at 5.75 times next year’s earnings. It also has a dividend yield of 3.10%. The market is already anticipating cash flows of FCX to significantly decline in the future. Meanwhile, other mining stocks are also trading at low valuations. Rio Tinto Plc is valued at 4.58 times earnings and has a dividend yield of 2.40%. Newmont Mining Corp. (NYSE:NEM) trades higher at 10 times earnings. Newmont Mining also carries a 2.90% dividend yield. When copper prices recover, it is easily for FCX to trade above $40 per share.
tau Unibanco Banco Holding SA (NYSE:ITUB)
tau Unibanco is a commercial bank based in Brazil. Its shares have declined by 34.4% for the year. In this environment, financial stocks have taken a hit. In fact, some market pundits advise investors to avoid banks. Investors looking to accumulate financial stocks should do so with a cautious attitude. There are few solid banks worth a look. One of them is an international banking stock like Itua Unibanco. The bank has grown its revenues by 29.73% over the last 5 years. This translated to earnings per share growth of 6%. This is higher than its peers. Most of the banks I have screened have revenue and earnings per share growth of 14% and 4%, respectively.
At the current price of 15.75, the stock is trading at 6.62 times next year’s earnings and carries a dividend yield of 0.60%. This is lower than other international banking stocks. Banco Bradesco SA (NYSE:BBD) is valued at 9 times earnings and has a dividend yield of 0.70%. Meanwhile, HSBC Holdings (HBC) trades at 8.90 times and carries a dividend yield of 4.80%. The silver lining is that Brazilian consumer spending is increasing and somewhat resilient. This bodes well for a dominant local bank like Itau Unibanco.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.