Overview
The state of affairs in Europe, China, the United States and emerging markets such as Brazil and India suggest to their respective central banks it's time to increase liquidity and ease rates. Fears of a global slowdown are prevalent. Market participants have swapped out fears of inflation for disinflation. Recent economic numbers out of the U.S. and global economies were deflationary in character, giving the Fed and other central banks carte blanche to ramp up another round of quantitative easing. Moreover, Europe's only viable tactic is to paper its way out of insolvency with the current debt to GDP levels. China and other emerging markets such as Brazil and India are lagging far behind the U.S. in growth. The one positive is many of the central banks of these countries still have the firepower to combat a disinflationary environment. This may bring about a hyperinflationary environment favorable to commodity stocks.
I have chosen five commodity stocks that have had significant pullbacks, yet have strong fundamentals and catalysts for future growth. I believe four of the stocks have bottomed and present an excellent buying opportunity. One stock looks great, nevertheless I would avoid it for now. Please review the following sections for my in depth analysis of each stock.
Company Specific Reviews
In the following sections, we will take a close look at these commodity stocks to determine if value exists. We will perform a review of the current fundamental and technical state of each company as well as any long or short term catalyst for future growth. The following table depicts summary statistics and Tuesday's performance for the stocks.
(click to enlarge images)
Alcoa, Inc. (AA)
Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 46% below its 52 week high and 32% below the analysts' consensus mean target price of $11.73 for the company. Alcoa was trading Tuesday for $8.90, up 2.42% for the day.
Fundamentally, Alcoa has several positives. The company has a forward PE of 9.08. Alcoa is trading for 13 times free cash flow and approximately two thirds of book value. EPS next year is expected to rise by 88.46%. Insider ownership is up 20% over the past six months and the company pays a dividend with a yield of 1.35%.
I believe Alcoa presents a buying opportunity at this level. The stock has recently bounced off its low of just under eight dollars. The stock has recorded higher highs and higher lows in recent weeks. The stock is poised to breech the 50 day sma in short order. This may be a good point to start a position.
Barrick Gold Corporation (ABX)
Barrick is trading well below its consensus estimates and its 52 week high. The company is trading 27% below its 52 week high and 46% below the analysts' consensus mean target price of $58.73 for the company. Barrick was trading Tuesday for $40.28, basically flat for the day.
Fundamentally, Barrick has several positives. The company has a forward PE of 7.07. Barrick has a PEG ratio of 0.32 and trades for approximately 1.67 times book value. EPS next year is expected to rise by 21%. The company has a net profit margin of 31% and pays a dividend with a yield of 1.99%.
Barrick looks strong here. The stock should rally on any hint of QE from the FED Wednesday. The company has a 30% net profit margin. That means approximately one out of three dollars makes it to the bottom line. Gold has been underperforming the market and out of favor for all of 2012. I posit this may be an inflection point for the yellow metal. Gold could be poised to rally as central banks ease and Barrick is a great way to gain exposure. I like the stock here.
Molycorp, Inc. (MCP)
Molycorp is trading well below its consensus estimates and its 52 week high. The company is trading 67% below its 52 week high and 113% below the analysts' consensus mean target price of $44.00 for the company. Molycorp was trading Tuesday for $20.66, up almost 4% for the day.
Fundamentally, Molycorp has several positives. The company has a forward PE of 6.34. Molycorp has a PEG ratio of 0.53 and trades for approximately 1.62 times book value. EPS next year is expected to rise by 140%.
Molycorp shareholders have been whipsawed throughout the history of this stock. I dabbled in the name over a year ago as the stock made its first meteoric rise. At that point in time there was a lot of talk about bubble conditions in the stock. The stock has come down quite a bit from those days and has favorable fundamentals at this point. Nevertheless, the stock has languished at the 20 dollar mark for nearly a month. I would avoid the stock until it makes a significant move off the bottom. I want to see the stock in a confirmed uptrend prior to starting a position.
Potash Corp. of Saskatchewan, Inc. (POT)
Potash is trading well below its consensus estimates and its 52 week high. The company is trading 34% below its 52 week high and 33% below the analysts' consensus mean target price of $54.47 for the company. Potash was trading Tuesday for $40.99, up over 5% for the day.
Fundamentally, Potash has several positives. The company has a forward PE of 10.73. Potash has a PEG ratio of 1.23. Potash pays a dividend with a yield of 1.37% and has a net profit margin of 34%. Potash's ROE is 36.55%.
UBS reiterated their Buy rating on the stock in April with a $56 price target. The USDA reported declining crop conditions for the second week in a row in a report issued Monday. Only 63% of the corn and 56% of Soybeans are rated as good or excellent condition, much less than last year.
Currently, corn futures are at their highest level in a month. Corn stockpiles are projected to hit a 16 year low this summer. The drought conditions in the U.S. combined with extremely low temperatures in Russia are seen as the culprits. Couple these developments with possible QE programs kicking in and you have a recipe for profits. I like the stock here.
Silver Wheaton Corp. (SLW)
SLW is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and 54% below the analysts' consensus mean target price of $44.23 for the company. SLW was trading Tuesday for $28.67, flat for the day.
Fundamentally, SLW has several positives. The company has a forward PE of 15.84. SLW has a PEG ratio of 0.48. SLW pays a dividend with a yield of 1.26% and, according to Finviz.com, has a net profit margin of 75%. Quarter over quarter sales and EPS are up over 26% and 20% respectively.
SLW is my silver pick. The stock has definitely bottomed and is now in a well-defined uptrend posting higher highs and higher lows for several weeks now. I like the stock here.
Conclusion
I believe these stocks present a buying opportunity. I am considering buying a basket of these stocks if the FED indicates another round of QE is in the cards. Many spiked up today on anticipation of the news. I would wait a few days to start a position as the short term traders take profits and move on. The one stock to hold off on is Molycorp. I need to see a confirmed uptrend in the stock prior to opening a position. These are long-term investments. You can expect more volatility near-term for all equities.
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.
