4 Undervalued Market Leaders To Watch In 2012

by: Kevin Quon

Rounding first base for the 2012 year with March coming to an end, expectations remain on the fence as investors ponder whether this strong rally can truly continue. Since the volatile headache experienced in September 2011, the market has added an additional 30%, leaving many value investors scratching their heads in the search for discounted equities. Yet long-term deals abound for the more patient and risk-taking investor. Industry sectors that have become the short-term whipping boy of the market often stand as lucrative opportunities for those with a more passive investing disposition.

The following four companies have seen their share of difficulties in this rising market in light of unsettled and often complex trading environments. Yet while each have been adequately punished in light of events either attributable to the company or not, they each occupy a leading market space in their own respective fields. Above all, as time often serves as the healer of all wounds, investors may wish to monitor or act upon these companies in light of the improving situations found in each. All values were taken as of March 28, 2012.

Company Name Market Cap. Fwd. Price-to- Earnings Price-to-book Industry
First Solar (FSLR) $2.17 B 5.84 0.59 Thin-Film Solar
Renewable Energy Group (REGI) $290 M 4.3 1.16 Biodiesel Producer
DryShips (DRYS) $1.4 B 8.05 0.44 Dry Bulk Shipping
Xinyuan Real Estate (XIN) $222 M 2.11 0.35 Chinese Real Estate

First Solar. The company has been all but massacred in its fall from grace. Once the darling of the solar industry when the company's stock traded north of $310/sh. in 2008, First Solar has plunged to $25.07/sh. at last check. While its poor management fumbles over itself with its continually worsening expectations, the industry has gone from a condition of worsening to catastrophic in light of a struggling Europe and an imminent end to lucrative subsidies. Yet First Solar remains a leader when it comes to thin-film solar modules, and enjoys numerous cost advantages that allow them to maintain a head above their competitors. Huge write-offs to the company's goodwill figures may appear misleading should investors believe that the company swung to a significant loss operationally in the last quarter. Indeed excluding one-time costs, the company earned $1.26/sh, and continues to expect 2012 adjusted earnings to come in at $3.75 to $4.25. Therefore, even as the company trades at near half of book value, it continues to grow at a satisfying rate when considering the large discount at hand. With an inevitably expanding demand for solar worldwide, it'd be foolish to believe the industry is about to collapse upon itself in full.

Renewable Energy Group. Where subsidies fail one green energy sector, another one thrives on the helping hand of energy credits set by market forces and government mandates. As the largest biodiesel producer in the nation, the company has exploited the rising value of renewable identification numbers ultimately allowing for the company to sell its biodiesel at a rich price of $5.20/gallon in the last quarter. Yet the sector has lagged of late in light of the poor progress experienced by the advanced fuel biofuel developers such as Amyris (AMRS) and Gevo (GEVO). Though Renewable Energy Group fails to offer an innovative technology that can be a game changer in the long run, the company excels as it specializes in being a volume leader in a realm where production capacity is hard to come by. With government mandates poised to increase the demand for more biofuels in the coming decade, the company is sure to take its share of the spoils upfront.

DryShips. Formerly a pure-play specialist in the dry bulk shipping industry, DryShips has since evolved its operations to include deep-sea drilling rigs through its majority owned subsidiary of Ocean Rig (NASDAQ:ORIG). Once ridiculed for this maneuver, the company has since enjoyed the relative stability of ORIG's oil revenues in a manner that has served as a life vest for its shipping fleet. With dry bulk shipping rates pressing all-time lows in light of overwhelming capacity coming online, the true winners of this industry will be the companies who are capable of patiently waiting out the market lull without folding first. With rates expected to stay low until 2013 and beyond, it's clear that many companies will not survive. Yet while the industry suffers, DryShips continues to position itself having accurately timed its charters and renewed its fleet with much younger ships. Though management remains a coin-toss for a skeptical investment base, the hybrid that DryShips has become serves as a refreshing advantage for a market gasping for relief.

Xinyuan Real Estate. Barring the possibility of outright fraudulence and a market snap in the Chinese real estate market, Xinyuan offers one of the best value plays trading on the NYSE. Yet it's for these very two aforementioned reasons that the company's stock price trades where it does today. As a residential real estate developer in China, Xinyuan has prospered from both the rising housing costs and the rapid development of the country. While fears of a real estate crash may abound, ironically Xinyuan finds itself even further sheltered as a developer of Tier 2 and Tier 3 cities. These are less prone to being adversely affected from the overheating market concerns of Tier 1 cities. With $488 million in cash and cash equivalents as of December 2011, the company currently holds in cash more than double the worth of its market capitalization. With total equity of $635 million and growing, the current market capitalization of $222 million appears to suggest that Xinyuan could be severely undervalued at present.

Disclosure: I am long FSLR, XIN, REGI, DRYS, AMRS.