A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.
This is a great quote from Wayne Gretzky. I believe it pertains to the current situation in the commodities market. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most likely end up on the wrong side of the trade.
All these stocks are currently out of favor. I see that as a big positive. The world's central banks have been taking action as of late. The FED is prepared to take action by implementing a new round of quantitative easing if necessary. The Bernanke put is in place.
I would not be as confident in my position if the same thing had not happened for the past two summers. The doom and gloomers remind me of the story of the boy who cried wolf. I know that at one point the wolf actually shows up, even so, the central banks of the world have enough firepower in reserve to take the proverbial wolf out.
The reason I'm not so worried about Europe is the issue has been ongoing for nearly three years now. How much worst can it get? The risk/reward favors long trades at this point as far as I'm concerned.
Finally, we have had a pretty good earnings season so far. I know it's on lowered expectations, nevertheless, that just goes to show how negative the sentiment is right now. Everyone you talk to thinks we are in a synchronous global slowdown. Who ever thought of that phrase deserves a Peabody award. It sounds really scary.
My instincts tell me we are in nothing more than another summer swoon and it's time to start looking for buying opportunities in the commodities sector. This is a sector that gets shellacked each summer and snaps back once everyone is back from vacation and upgrades on valuation ensue.
This does not mean all beaten down commodities stocks are a buy at these levels. In the following sections we will perform a review of the fundamental and technical state of five commodity related stocks that are trading at their lows. 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.
Alcoa, Inc. (AA)
Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 47% below its 52 week high and has 29% potential upside based on the analysts' consensus mean target price of $10.68 for the company. Alcoa was trading Friday for $8.26, down over 1% for the day.
Fundamentally, Alcoa has several positives. The company has a forward P/E of 9.05. Alcoa is trading for 21 times free cash flow and approximately two thirds of book value. EPS next year is expected to rise by 155.17%. The company pays a dividend with a yield of 1.45%.
Alcoa beat earnings estimates last quarter. Alcoa observed robust showings across all its businesses compelled by higher utilization rates, process innovations, lower scrap rates and usage reductions. The company expects improved aluminum demand from automobile, aerospace, packaging and commercial transportation end markets. The stock is trading at historic lows. I bought Alcoa at this level recently and sold as the stock neared $9. I am considering starting a position now. I like the stock here.
Peabody Energy Corp. (BTU)
Peabody is trading well below its consensus estimates and its 52 week high. The company is trading 63% below its 52 week high and has 74% upside based on the analysts' consensus mean target price of $39.50 for the company. Peabody was trading Friday for $22.66, down almost 1% for the day.
Fundamentally, Peabody has several positives. The company has a forward PE of 7.08. Peabody is trading for 8.49 times free cash flow and slightly over book value. EPS next year is expected to rise by 26.98%. Insider ownership is up 158% over the past six months and the company pays a dividend with a yield of 1.5%.
Peabody recently entered into an agreement with Kinder Morgan Partners (KMP) to expand the Gulf Coast coal-export platform for its Colorado, Powder River Basin and Illinois Basin coal products. The additional access could increase Peabody's Gulf coal export capacity by 5M-7M tons/year starting in 2014. This will allow increased service to its international customer base.
The stock has been taken down in sympathy with Patriot Coal (PCX) which confirmed earlier in the month they have filed for Chapter 11 bankruptcy protection. I can't see sentiment getting much worse. The stock has been consolidating in the low twenties since mid-May. I recent pullback is a buying opportunity prior to the next leg up. The stock is a buy here.
Chesapeake Energy Corporation (CHK)
Chesapeake is trading well below its consensus estimates and its 52 week high. The company is trading 51% below its 52 week high and has 37% potential upside based on the analysts' consensus mean target price of $23.54 for the company. Chesapeake was trading Friday for $17.20, down almost 6% for the day.
Fundamentally, Chesapeake has several positives. The company has a forward P/E of 12.03. Chesapeake is trading for 69% of book value. According to Finviz.com, EPS next year is expected to rise by 346.88%. The company pays a dividend with a yield of 2.03% and has a PEG ratio of 0.78.
Chesapeake slide on heavy volume Friday. Reuters reported the SEC's Texas office is demanding documents from Chesapeake as part of the agency's probe into the company's deals with CEO Aubrey McClendon. Furthermore, Baker Hughes (BHI) reported U.S. natural gas well rig counts are down to 518 due to weak prices. That figure represents a 45% drop from October's high marking a 13-year low. This is not good news for Chesapeake. I would stay away from this stock until further notice. Avoid Chesapeake. There are still too many unanswered questions.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 39% below its 52 week high and has 47% potential upside based on the analysts' consensus mean target price of $49.79 for the company. Freeport was trading Friday for $33.77, down almost 2% for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 6.96. Freeport is trading for slightly less than two times book value. EPS next year is expected to rise by 40.58%. The company pays a dividend with a yield of 3.70% and has a net profit margin of 21.98%.
Dahlman Rose reiterated their Buy rating on the stock on July 17th with a price target of $45. Freeport met expectations for the second quarter on revenues and beat expectations on earnings per share. Year over year revenue and GAAP EPS dropped significantly. Although earnings and revenues tumbled year over year, Freeport is on track to increase annual copper production by more than 25% during the next three years through brownfield investments. Additionally, the price of copper has remanded strong and supply is tight even with the recent global slowdown. The risk/reward ratio looks good here. Freeport is a buy.
United States Steel Corp. (X)
US Steel is trading well below its consensus estimates and its 52 week high. The company is trading 58% below its 52 week high and has 60% potential upside based on the analysts' consensus mean target price of $30.11 for the company. US Steel was trading Friday for $18.81, down over 4% for the day.
Fundamentally, US Steel has some positives. The company has a forward PE of 6.62. US Steel is trading for 78% of book value. EPS next year is expected to rise by 106%. Insider ownership is up 25% over the past six months and the company pays a dividend of 1%.
U.S. Steel has been beaten down with the rest of the sector base on a gloomy macroeconomic outlook and competition from Chinese steel companies. Nevertheless, steel prices are at record lows. I see a potential turnaround in emerging markets in the second half of the year bolstered by central bank rate cuts and quantitative easing programs. The sentiment on the stock is so low, I think U.S. Steel may surprise when they announce earnings on July 31st. I like the stock here and am tempted to start a position prior to earnings.
You have to buy low to sell high. I am not buying the gloom and doomers forecast that we are heading for a recession. I say we are simply in the usual summer doldrums. This is the precise time to pick up shares in beaten down stocks. Don't be hypnotized by hype and negative headlines. This is what causes investors to sell at market bottoms and buy at the tops. On the other hand, don't expect these stocks to make you a quick buck either. There may be more volatility ahead. These are long-term buys.
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 10% at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses further if you wish.