Vale, S.A. (VALE) shares were trading around $26 in February but the stock has been absolutely slammed in the past several weeks, and now trades below $20 per share. Since this company mines and produces iron ore, steel, fertilizer and other basic materials, investors are concerned that demand will fall along with the global economy.
There seems to be many issues looming over the global economy, and I think it's completely reasonable to expect another recession in at least some parts of the world. However, a lot of bad news appears to already be priced into Vale, shares and investors with a longer-term horizon should consider averaging into a position over time. Investors with a short-term horizon could also do well as Vale shares appear due for a rebound:
1) The stock appears undervalued at current levels. It is trading for a small premium to book value which is $14.87, plus the price to earnings ratio is just about 6 times. This is way below the market average of nearly 13 times. Another indicator of undervaluation is that the stock now yields nearly 6%, which is close to rates for high yield bonds. The company remains very profitable and it has a solid balance sheet.
2) It's hard to argue against recent data that points to slowing growth in China (which is a major importer of iron ore and fertilizer products), and there is no doubt that Europe's economy is in trouble. Even some of the economic news in the United States points to a slowdown. However, Vale shares are not priced for perfection, so much of this negative news could already be reflected in the stock. Furthermore, while a global economic downturn would likely impact revenues for Vale, it might not be that scary because it does produce basic materials and products like fertilizer that are consumed whether or not times are good.
3) The stock market in the United States and in many other countries has been down for almost 9 days in a row. In the past, when investors get this negative, and short sellers get carried away, the markets often come roaring back, either on their own or with the help of central banks. I think the situation with the global markets is getting close to the point where we might see coordinated action by some of the top central bankers.
This could be in the form of additional rate cuts, stimulus plans, and other loose money policies. Chances are that the Federal Reserve is not just going to let the U.S. and global economy slide off a cliff without trying a few more measures. When and if these measures are announced, economically sensitive and badly depressed stocks like Vale are likely to rebound.
Here are some key points for VALE:
- Current share price: $19.02
- The 52 week range is $18.96 to $33.74
- Earnings estimates for 2012: $3.63 per share
- Earnings estimates for 2013: $3.68 per share
- Annual dividend: $1.15 per share which yields 5.6%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
