The state of affairs in Europe, China and the United States has lead central banks across the globe to increase liquidity and ease rates. Fears of a global slowdown are prevalent. Market participants have swapped out fears of inflation for deflation. 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. The market is essentially in a holding pattern awaiting the release of the FOMC meeting minutes due out tomorrow for signs of a possible QE program in the offing.
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 experiencing slowdowns in growth as well. The one positive is China's central bank still has the firepower to combat a global downturn.
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. Please review the following sections for my in depth analysis of each stock.
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.
Devon Energy Corporation (DVN)
Devon is trading well below its consensus estimates and its 52 week high. The company is trading 33% below its 52 week high and 48% below the analysts' consensus mean target price of $82.58 for the company. Devon was trading Tuesday for $55.33, over 2% for the day.
Fundamentally, Devon has several positives. The company has a forward PE of 9.60. Devon pays a dividend with a yield of 1.42%. Devon's expected EPS growth rate for next year is 30%. The company's profit margins are improving. The current net profit margin is 18.29%.
Devon is trading for 50% below its mean target price. The company was hit hard by the glut of natural gas on the market. Natural gas prices have been steadily rising over the last few months. The stock has been consolidating at this level since the start of June. I believe Devon presents a buying opportunity at this level.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and 55% below the analysts' consensus mean target price of $52.20 for the company. Freeport was trading Tuesday for $33.00, down almost 5% for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 6.84. Freeport is trading for slightly over two times book value. EPS next year is expected to rise by 28.83%. The company pays a dividend with a yield of 3.62% and has a net profit margin of 24.64%.
China is currently the top copper consumer accounting for approximately 40 percent of the world's demand. China unexpectedly issued a rate cut recently which raised concerns that their economy was growing at a slower pace than reported. These developments along with a strong dollar drove copper prices to their lowest level in two weeks. You have to buy low to sell high. This is a contrarian call. Nonetheless, Freeport has only dipped below $30 once in the past five years and that was due to the 2008 debacle when the entire market was crushed. The risk/reward ratio looks good here.
Marathon Oil Corporation (MRO)
Marathon Oil disappointed Wall Street analysts when it reported that first quarter net income dropped by 58% subsequent to a drop in production and natural gas prices. The Houston oil and natural gas producer reported earnings of $417 million, or 59 cents per share, for the first three months of the year. That compares with $996 million, or $1.39 per share, in the year-ago quarter that included $541 million from Marathon's refining business that was spun off last June.
Marathon has several fundamental positives. Nevertheless, with such a significant drop in net income, I would avoid the stock until after it reports earnings in August. We are currently in an extremely tough environment for stocks. Marathon is in the penalty box until it proves it is back on track. Avoid this one for now.
Noble Energy, Inc. (NBL)
Noble is trading well below its consensus estimates and its 52 week high. The company is trading 21% below its 52 week high and 36% below the analysts' consensus mean target price of $113.18 for the company. Noble was trading Tuesday for $83.05, down over 2% for the day.
Fundamentally, Noble has several positives. The company has a forward P/E of 11.04. Noble is trading for two times book value. EPS next year is expected to rise by 31.23%. The company pays a dividend with a yield of 1.04% and has a net profit margin of 17.43%.
Goldman Sachs says a pullback in shares of domestic oil producing firms appears to be overdone. The firm reaffirmed Conviction List Buy ratings for Noble Tuesday morning. I agree with Goldman. This is the premise of my contrarian argument. We are in the midst of the summer swoon. This has been an ideal time to buy energy stocks in each of the past two summers. I like the stock here.
Schlumberger Limited (SLB)
Schlumberger is trading well below its consensus estimates and its 52 week high. The company is trading 30% below its 52 week high and 33% below the analysts' consensus mean target price of $87.48 for the company. Schlumberger closed Tuesday at $65.02, down over 1% for the day.
Schlumberger has many fundamental positives. The company is trading for 2.7 times book value and has a forward PE of 12.73. Schlumberger's EPS growth rate for next five years is 18.04% and the company has a PEG ratio of .96. Schlumberger offers a dividend with a 1.67% yield and a 27.07% payout ratio. Schlumberger's profits margins are healthy with 12.41% going to the bottom line.
Schlumberger purchased a 20% stake in Hong Kong-listed Anton Oilfield Services as it seeks to enter China's nascent but potentially game-changing shale gas industry. Barclays calls the deal a "significant development" in China's shale industry, as Schlumberger's expertise will allow the Chinese government to reach its production targets to tap its huge shale resources. This could lead to major growth for Schlumberger. Schlumberger has held the $65 mark three times in the past year. The stock is a buy here.
I believe these stocks present a buying opportunity. I am considering buying a basket of these stocks if the FMOC meeting minutes indicate another round of QE is in the cards. The dollar is trading at two year highs compared to the euro. The strength in the dollar may give the Fed the wiggle room it needs to implement additional QE measures.
The one stock to hold off on is Marathon. I would wait until after the next earnings report prior to opening a position. These are contrarian picks with long-term time horizons. You can expect more volatility near-term for all equities. 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 further.
This information is to be used as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.