The time to buy is when there's blood in the streets, even if the blood is your own.
This well-known maxim is credited to Baron Rothschild, a British financier and member of the famous banking family, who reportedly made a fortune buying in a panic following the Battle of Waterloo.
What a great contrarian quote. In investing, a contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive cynicism about a stock or sector can drive the price so low that it exaggerates the investment's perils and belittles its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett. I believe these stocks may present such an opportunity.
First, these five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 58% below their 52 week highs and 84% below their consensus analysts' mean target prices. This means analysts expect these stocks to nearly double within the next 12 months. We are in the midst of a sell off based on macroeconomic and geopolitical issues. Often, this is precisely the time to pick up shares in out of favor stocks.
Second, these stocks have an average Relative Strength Index (RSI) of 19 which indicates the stocks are extremely oversold. The RSI indicator is a technical analysis indicator used to measure momentum on a scale of zero to 100. Stocks are considered to be oversold if the RSI reading falls below 30, 20 is an extremely oversold situation.
Finally, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and guidance. Now, simply screening for S&P 500 stocks trading significantly below consensus and 52 week highs with extremely low RSI's and some strong fundamental data is only the first step to finding winners that may provide alpha.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Friday's performance for the stocks.
Coals stocks have been decimated over the past year. The glut of natural gas on the market has caused a paradigm shift. Cheap natural gas is being used as an alternative electric power generation fuel. Nevertheless, the coal and natural gas industry is known to quickly rebalance supply and demand. Natural gas prices have rebounded to $2.74 per MCF in the past few weeks and the futures contracts have it rising higher into 2013. This bodes well for coal prices and coal stocks.
Alpha Natural Resources, Inc.
Alpha is trading well below its consensus estimates and its 52 week high. The company is trading 80.77% below its 52 week high and 102% below the analysts' consensus mean target price of $22 for the company. Alpha closed Friday at $10.89, down 5.55% for the day. Alpha has some fundamental positives. Alpha has an average earnings per share growth projection for the next year of over 40%. The company is trading at nearly a third of book value and quarter over quarter sales are up 71.10%. Alpha's RSI is 20.34.
Alpha cut its guidance for 2012 shipments and capital expenditures after posting a second straight quarterly loss as demand and prices fell. Alpha's guidance for shipments of metallurgical coal used by steelmakers and thermal coal burned at power stations were lowered by 7.5 million tons. Alpha's first quarter loss excluding other items was 27 cents, vastly less than estimates. I can't get behind this stock until management updates guidance. I would avoid Alpha for now.
Peabody Energy Corp.
Peabody is trading well below its consensus estimates and its 52 week high. The company is trading 62% below its 52 week high and 89% below the analysts' consensus mean target price of $44.88 for the company. Peabody closed Friday at $23.77, down 4.77% for the day. Peabody has many fundamental positives. Peabody has an average earnings per share growth projection for the next year of over 34.83%. The company is trading at just over book value, has a PEG ratio of .42 and a forward PE of $6.60. Peabody pays a dividend with a 1.43% yield. Peabody's RSI is 20.34.
Peabody's earnings beat the street's expectations. The beat was fueled in part by production gains in Australia - spills over to help lift up other select names in the beat-up sector along with word that U.S. coal exports to China may double in 2012. Q1 EPS of $0.67 beat estimates by $0.13 while revenues of $2.04B were up 17% year over year and in-line with expectations.
I believe these coal stocks are in the process of bottoming. We seem to have had some panic selling in recent weeks. Even so, I would wait for a confirmed turnaround in the trend prior to starting a position in either stock.
Cliffs Natural Resources Inc. (CLF)
Cliffs is trading well below its consensus estimates and its 52 week high. The company is trading 51.25% below its 52 week high and 96% below the analysts' consensus mean target price of $91.49 for the company. Cliffs closed Friday at $46.69, down 2.29% for the day. Cliffs has many fundamental positives. Cliffs has an average earnings per share growth projection for the next year of over 26.32%. The company is trading at just over book value and has a forward PE of $4.51. Cliffs pays a dividend with a 5.13% yield and trades at just eight times free cash flow. Cliffs' RSI is 14.58.
Cliffs Q1 revenue grew by 7% year over year driven by higher sales volumes across all of the company's reporting segments. Global iron ore sales volume sets new production record of 8M tons, which was partially offset by higher expenses and lower sales prices. The stock has been in a virtual free-fall. Nevertheless, it is 5% from its October low of $46.51, which could mark the bottom. I like the stock here. I would wait and see if the stock bounces off the October low first and then start a position.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 42.74% below its 52 week high and 68% below the analysts' consensus mean target price of $53.30 for the company. Freeport closed Friday at $31.81, down 1.13% for the day. Freeport has many fundamental positives. Freeport has an average earnings per share growth projection for the next year of over 29.78%. The company is trading at just under two times book value and has a forward PE of $6.08. Freeport pays a dividend with a 3.93% yield and has a net profit margin of 24.64%. Freeport's RSI is 19.23.
Freeport's CEO Richard Adkerson sees big Chinese demand boosting copper, and to that end Freeport will increase its capital expenditure budget to $4.3 billion in 2012 and $4.2 billion in 2013 from $2.5 billion last year. Since the world's top 10 copper mines combined produce only approximately 5M tons per year, handling increased demand would require "significant investment" in new reserves.
Freeport is reaching toward its October low as well. I believe Freeport at $30 is a steal. I am considering starting a position at this level.
United States Steel Corp. (X)
U.S. Steel is trading well below its consensus estimates and its 52 week high. The company is trading 54.13% below its 52 week high and 67% below the analysts' consensus mean target price of $36 for the company. US Steel closed Friday at $21.56, down 3.88% for the day. U.S. Steel has many fundamental positives. U.S. Steel has an average earnings per share growth projection for the next year of over 49.40%. The company is trading at just under book value and has a forward PE of $5.75. U.S. Steel pays a dividend with a 0.93% yield and has a net profit margin of 24.64%. US Steel's RSI is 17.76.
U.S. Steel said Tuesday its first-quarter loss increased to $219 million, or $1.52 a share, from $86 million, or 60 cents a share, in the year-ago period. The latest results included a loss of $399 million from the sale of the company's U.S. Steel Serbia unit. The company's revenue increased to $5.17 billion from $4.86 billion. Wall Street analysts expected U.S. Steel to earn 44 cents a share on revenue of $4.94 billion, according to a survey by FactSet Research. Looking ahead, U.S. Steel expects all three of its operating segments to "reflect positive results from operations" in the second quarter.
The RSI on this stock is the lowest of the bunch. However, it still has 15% to go prior to reaching its 52 week low, which I think is very possible. I would wait for another 10% drop or a sign of trend reversal prior to starting a position in this name.
All these stocks are getting crushed regardless of some beating estimates, making positive remarks and guiding higher. This is what happens when macro-economic headlines take precedent over fundamental statistics. The recent developments over this weekend regarding the G8 meeting I believe will be seen as a positive for these basic materials stocks. Watching the Sunday morning talk shows, it seems the consensus from the G8 meetings is more stimulus and less austerity will be needed to spark growth across world markets. Additionally, eurozone leaders agreed they do not want to have Greece leave the European Union. This takes the eurozone implosion thesis off the table for now. All these stock appear oversold and undervalued. There may not be blood in the streets just yet, but these companies have been seeing red for quite some time. Alpha is the one stock I would avoid for now. With management lowering guidance for the year, I do not see much opportunity for upside in the near term.
These are contrarian speculative picks. Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.