2 Basic Material Stocks With 50% Upside In 2012

Includes: CLF, ROCK
by: Bret Jensen

The basic material sector has been crushed over the last six months. Concerns around Europe and slowing worldwide growth have taken a huge toll on basic material stocks. I think the sell-off has been overdone, unless we are indeed heading towards another worldwide recession. Here are two equities with cheap valuations, growing earnings and that are priced 50% or more under consensus price targets.

Rockwood Holdings (NYSE:ROC) –

“Rockwood Holdings, Inc. develops, manufactures, and markets specialty chemicals and materials for industrial and commercial applications primarily in Germany, the United States, and Europe. The company’s specialty chemicals include lithium compounds and chemicals; metal surface treatment chemicals, including corrosion protection/ prevention oils; natural and synthetic metal sulfides; and maintenance chemicals”. (Yahoo Finance)

Performance 6 months (Compared to S&P) : -25.73%

Current Price: $39.37

Consensus Price Target: $59

Key value observations on ROC:

  • The company has a forward PE of just 9.4, which is an over 40% discount to its five year average.
  • The stock has been punished as 50% of its revenues come from Europe. However, divestures of lower margin businesses and debt reduction should power earnings in the future.
  • The stock has beat earnings estimates 5 of the last 6 quarters. The average beat over consensus the last four quarters has been 20%.
  • The stock is selling severely under analysts’ price targets. The consensus price target on ROC is $59, 50% above current levels. Credit Suisse has an “outperform” rating and a $66 price target on Rockwood Holdings.

Cliff’s Natural Resources (NYSE:CLF) –

“Cliff’s Natural Resources Inc., a mining and natural resources company, produces iron ore pellets, lump and fines iron ore, and metallurgical coal products. The company operates six iron ore mines in Michigan, Minnesota, and eastern Canada; two iron ore mining complexes in Western Australia; five metallurgical coal mines located in West Virginia and Alabama; and one thermal coal mine located in West Virginia”. (Yahoo Finance)

Performance 6 months (Compared to S&P) : -29.11%

Current Price: $62.35

Consensus Price Target: $110

Key value observations on CLF:

  • The stock is selling near the bottom of its five year valuation range based on P/S, P/E, P/B and P/CF.
  • Its forward PE is less than 5-- more than a 65% discount to its five year average.
  • The company has crushed consensus earnings estimates in 3 of the last 4 quarters. It also has a five year projected PEG of just .37. It is priced at 4 times operating cash flow.
  • The median analysts’ price target on CLF is $110. It is a five star stock pick from S&P, which has a $105 price target on the stock.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLF over the next 72 hours.