Vale S.A. (VALE) is a leading natural resource company, and is based in Brazil. As Vale produces iron ore and fertilizer products, it is an economically sensitive company. (Iron ore is primarily for making steel products which is then used in construction and manufacturing.) China is a major consumer of fertilizer and iron ore and demand from that country has recently weakened. This type of weakness is not likely to last as the population in China continues to expand and the global economy will also eventually show growth. The average stock in the S&P 500 Index trades for about 13 times earnings, so Vale shares could easily see strong gains in the future from multiple expansion because the shares only trade at about half that level. Some investors have been concerned by ongoing tax litigation issues which are specific to Vale, but according to one analyst the impact should be limited and the stock is rated "outperform". Long-term investors should consider buying this stock at current levels and even more so on dips. Here are 4 reasons to consider Vale shares now:
- Brazil made an unexpectedly large rate cut in March, slashing rates from 10.5% to 9.75%. That is a significant rate cut, and if needed, Brazil has room to cut rates even more. In the next couple of quarters, the effects of the rate cut could start to positively impact the Brazilian economy and Vale could benefit.
- China is seeing slowing economic activity, and it is a leading consumer of natural resources from countries like Brazil and from companies like Vale. A rebound in the Chinese economy is what is needed to put investors back into Vale shares. Rate cuts are likely in China soon and that could boost demand for a number of products from Vale. Recent economic data from China increases the chances of a rate cut in the coming weeks, and that news could help boost Vale shares.
- Vale shares appear undervalued by just about every metric. The price to earnings ratio is around 5.5 times earnings. The stock pays a dividend that yields about 5%, which is way above average. The stock now trades well below the 52-week high of $34.74, and the stock trades at just a slight premium to book value which is $15.39 per share.
- Natural resources have historically been able to keep up with inflation. Since many central banks are continuing with loose money policies and currency printing, it could lead to inflation in the future. Investing in a asset rich natural resource company could lead to significant gains as inflation is likely to rise in the future.
The stock market appears to be at an inflection point, and it could see further weakness soon, so it makes to buy economically sensitive stocks like Vale on pullbacks, however, the long-term growth in China, Brazil, and for iron ore and fertilizer products makes this a great opportunity to buy cheap.
Key data points from Yahoo Finance:
- 52-Week Range: $20.46 to $34.74
- Dividend: $1.15 which provides a yield of 5%
- 2012 Earnings Estimate: $3.77 per share
- 2013 Earnings Estimate: $3.72 per share
- P/E Ratio: about 5.5 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.