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What follows is a list of companies specialized in basic materials that have meaningful room for appreciation. They cover a variety of industries: steel, chemicals, and aluminum. I am most bullish about Alcoa largely due to its high volatility, which will enable the firm to drive high risk-adjusted returns when the global economy hits full employment quicker than expected. The company has an attractive spread between past and forward multiples, which allow for significant value creation.

Vale (VALE)

Vale trades at a respective 5.5x and 6.4x past and forward earnings with a dividend yield of 2.6%. Consensus estimates for Vale's EPS forecast that it will decline by 13.5% to $3.77 in 2012 and then by 1.3% and 7.3% in the following two years. Assuming a multiple of 8x and a conservative 2013 EPS of $3.68, the rough intrinsic value of the stock is $29.44, implying 23% upside.

The steel producer has experienced considerable difficulties that set the bar low (pun intended). It originally had to declare force major on several of its iron ore interests while average prices remain low. With that said, management has showcased confidence over free cash flow by announcing that it will pay out no less than $6B in dividends.

DuPont (DD)

DuPont trades at a respective 14.5x and 11.2x past and forward earnings with a dividend yield of 3.1%. Consensus estimates for DuPont's EPS forecast that it will grow by 8.4% to $4.26 in 2012 and then by 12.2% and 11.7% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $4.68, the rough intrinsic value of the stock is $60.97, implying 14.2% upside.

The chemicals producer is experiencing meaningful growth in volumes as Pioneer represents a significant catalyst. I am further optimistic about how the Danisco takeover will unlock revenue and cost synergies. This value creation - particularly in the area where higher margins are concerned - can then be opportunistically leveraged for greater penetration in emerging markets. Accordingly, DuPont is safer than many bears will have you believe.

Alcoa (AA)

Alcoa trades at a respective 19.2x and 10.6x past and forward earnings with a divined yield of 1.2%. Consensus estimates for Alcoa's EPS forecast that it will decline by 31.9% to $0.49 in 2012 and then grow by 95.9% and 29.2% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $0.94, the rough intrinsic value of the stock is $13.16, implying 29.4% upside.

Based on my DCF model, I believe that Alcoa could be the top stock of 2012 in terms of shareholder returns. I model a double-digit growth rate over the next half decade or sound cost of goods sold, SG&A, R&D, capex, and taxes as 86%, 4.5%, 0.9%, 4.8%, and 24% of revenue, respectively. Net increases in working capital are normalizes too. Taking a perpetual growth rate of 2% and discounting backwards by a WACC of 7% yields a fair value figure of $14.35. This makes Alcoa a particularly attractive stock within the context of a full recovery.

Source: 3 Hot Basic Material Stocks Ready To Surge

Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.