Economic fear seems to be everywhere these days, and if there's anything the market hates, it's uncertainty, as can be attested by the remarkable volatility we've experienced over the first half of 2012. With the talking heads constantly hammering investors with headlines proclaiming the latest doom and gloom out of Europe, weak second-quarter earnings, multi-billion dollar bank losses and slowing growth in both the U.S. and China, it's no wonder so many investors jump in and out of the market or choose to stay on the sidelines altogether.
With all of this uncertainty in mind, we would all do well to remember my favorite quote from Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy when others are fearful." We've all heard this line before, but if investors had put this bit of wise advice to practical use as often as they've quoted it, I believe a lot more of us would be much closer to joining the Oracle as "one percenters."
With everyone so fearful, now certainly seems to be a good time for the long-term investor to be greedy, and I've chosen to highlight three stocks facing strong macroeconomic headwinds that are trading well off of their 52-week highs for the long-term investor to consider and apply Mr. Buffet's wisdom to.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Phoenix, AZ-based Freeport-McMoran is a leading international mining company and is the world's largest publicly-owned copper miner, the world's largest producer of molybdenum, and one of the world's largest gold producers. Freeport has global mining operations, including the Grasberg mining complex in Indonesia - the world's largest copper and gold mine in terms of proven and recoverable reserves.
Freeport sports a very strong balance sheet, with $4.8 billion in cash and only $3.5 billion in debt. The stock is trading at $33.48 as of July 27th, with a 52-week low of $28.85 and a 52-week high of $54.55. The company also offers a $0.3125 per share quarterly dividend, which gives them a healthy 4.0% yield with a very sustainable 32% payout ratio.
Like other miners such as Rio Tinto (RIO) and Southern Copper (SCCO), Freeport's recent earnings have been hurt by falling copper prices resulting from slowing demand in China and elsewhere, and by gold prices retreating from their recent historic highs. In addition, production has been disrupted at Freeport's Grasberg facility due to labor strikes, and the company faces the threat of the Indonesian government imposing significant mineral export taxes.
While copper prices may face short-term downward pressures, with improving U.S. and Chinese economies on the horizon, and emerging markets in India and South America continuing to grow and modernize, the long-term trend for copper prices has to be up. Gold prices should also resume their upward march as central banks continue their policies of ultra low interest rates and monetary easing to further stimulate economic growth. In addition, Freeport has recently made concessions that have settled the labor disputes and ended the strikes at its Grasberg mine. The company also has a pre-existing long-term contract with the Indonesian government which should take precedent over government saber rattling. Even so, Freeport is engaged in ongoing good faith negotiations with the Indonesian government.
This stock has a history of quick moves both up and down, and when the company reaches an expected settlement with the Indonesian government, I expect the shares to rally considerably. Combined with the long-term potential for rising copper and gold prices, Freeport-McMoran is a very compelling buy at current levels.
Peabody Energy Corporation (BTU)
Peabody Energy is the world's largest private sector coal company. The company was founded in 1883 and is based in St. Louis, MO. The company owns 30 coal mining operations in the U.S. and Australia, with over 9 billion tons of proven coal reserves. Peabody provides both metallurgical and thermal coal to customers in more than 25 countries.
If most investors were asked which industry is the most fearsome these days, I'm willing to bet most would choose coal. The coal industry has faced major headwinds over the last year in the form of all-time low natural gas prices, which have prompted many utility companies to switch from coal to the cleaner, more efficient natural gas for electrical generation. And with the stagnant European economy continuing to drag on the U.S. and China, demand for metallurgical coal for steel production has been weak as well. The industry has also been hurt by the obvious environmental concerns surrounding coal and by the perception of a hostile Obama Administration-led EPA. Shares in coal companies have suffered mightily, with all of the coal miners well below their 52-week highs. Patriot Coal (PCX), which was spun off from Peabody in 2007, recently filed for bankruptcy protection.
Peabody's balance sheet is not as strong as I'd like it, with $952 million in cash on hand and over $6 billion in long-term debt, but that compares favorably to other coal companies like Arch Coal (ACI). The stock is trading at $20.80 as of July 27th, with a 52-week low of $18.78 and a 52-week high of $58.78. Peabody pays a $0.085 quarterly dividend, giving it a 1.80% yield, at a miniscule 9% payout ratio.
Coal has been a primary energy source for centuries and, with renewable energy sources still decades away from reaching profitable efficiency levels, will remain so for the foreseeable future. Peabody Energy is widely considered to be one of the strongest of the major coal miners. Two of the world's largest (and least regulated) coal markets are China and India, and with its enviable Australian operations, Peabody is perfectly positioned to benefit from a rebound in coal demand from these two countries. Also, a recent rise in natural gas prices here in the U.S. has the coal industry showing some signs of life.
A recent Reuters report in Mining Weekly shows that the difference between coal and gas prices reached its narrowest in seven months in July. Also, with the possibility of the arrival of a new administration perceived to be more business and jobs friendly in November, Peabody stock has the potential to rally significantly before the end of 2012. Of course, investors should look very closely at this stock before jumping in and be prepared to hold it long term if the recovery scenario doesn't play out right away.
Navios Maritime Holdings Inc. (NM)
Navios Maritime Holding is a seaborne shipping and logistics company. The company operates a fleet of 31 owned and 26 chartered vessels, consisting of Ultra Handymax, Capesize, Handysize and Panamax ships, totaling 5.8 million dead weight tonnage. The company was founded in 1954 and it based in Piraeus, Greece.
Shares of Navios Maritime are currently trading at $3.41, with a 52-week low of $2.88 and a 52-week high of $4.49. Most shipping companies are currently mired in debt, but Navios Maritime's debt load, along with competitor Diana Shipping (DSX), seems to be manageable, with $510 million in debt and $160 million of cash on the books. The shares pay a $0.06 quarterly dividend for a tempting 7.3% yield, and at an also manageable 30% payout ratio, this dividend would appear safe.
If coal miners are among the most feared stocks in the market today, shipping companies probably run a close second. Just the words "Greece" and "shipping" are enough to send most investors fleeing towards the exits. With global demand slowing for dry bulk goods such as cement, coal, and iron ore, the shipping industry has more ships than goods that need shipping. The Baltic Dry Index is at its lowest level since its all-time highs in 2008, so a turnaround in the shipping sector would not appear to be happening anytime soon.
As with coal, investors must look closely at Navios before deciding to invest. Unlike most other shipping companies, Navios is actually profitable, having reported $8.5 million in net first-quarter income, and they continue to reduce expenses despite lower charter rates. Navios has also managed to avoid diluting shareholders with cash raising share offerings like many other shippers such as DryShips (DRYS). And if you believe in an impending copper and coal rebound, remember that both commodities travel on ships like those owned by Navios. Given their ability to continue reducing expenses and paying down debt, Navios Maritime could be in excellent position to help lead the shipping sector back to respectability, and they'll even pay you a 7.4% dividend to wait it out.
We've all heard and repeated the investing axioms like the Warren Buffett quote above and others like "buy 'em when nobody wants 'em," or "buy when there's blood in the streets," but now may be time for us to finally put our mouths where our money is, and the stocks highlighted above may just be the stocks to start with.
Disclosure: I am long FCX.
Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.