If you want to invest in defensive sectors, such as healthcare or pharmaceuticals, a stock like Johnson & Johnson (JNJ) could be ideal. It is in a stable industry that is fairly recession-resistant, it has a strong balance sheet, and it has a 3.6% dividend yield. If you are willing to take on more risk and buy stock in a company that is sensitive to the global economy, then Caterpillar Inc. (CAT) might make sense. It trades at a reasonable price to earnings ratio of about 10, and it offers a yield of 2%. However, if you are willing to buy a company that is based outside of the United States, you might take on more risk, but also be very well-rewarded for it.
Vale S.A. (VALE) shares have been beaten-down to near 52-week lows over a variety of concerns. However, it could be time to seriously consider buying the stock, as it now trades at what appear to be bargain levels. The stock currently trades for about 5 times earnings and it now yields almost 7%. Here are a couple points to consider:
1. Vale is one of the world's largest producers of iron ore and fertilizer. This company is based in Brazil, which gives it access to a resource-rich region, as well as reasonable labor costs. Iron ore is a key element in the manufacturing process for steel products, many of which are used in construction and for industrial purposes.
2. China's economy has seen a significant slowdown and some analysts even predict it could get worse with a "hard-landing". China's economy had been growing at a blistering pace with double-digit growth for the past few years. This was fueled by a boom in real estate, population growth, rising incomes, and Chinese government stimulus. Since China is a major consumer of fertilizer and iron ore, it imported a tremendous amount of natural resources from countries like Brazil, and companies like Vale.
Investors are now concerned that reduced demand from China could linger and even get worse. These worries and falling iron ore prices have caused many investors to sell Vale shares. It now trades just slightly above book value, which is $15.08 per share. However, investors could be overreacting, since China has been recently cutting rates in order to boost economic activity. (Brazil has also been cutting rates.)
While reduced demand for iron ore and fertilizer could remain an issue for the next few months, the stock might already be forming a bottom. Investors should consider this pullback in the Chinese economy and Vale shares as temporary. China is going to be a secular growth story for many years into the future and Vale shares should be a prime beneficiary of that growth in the long run.
Key Data Points:
- Current price: $16.56
- 52-Week Range: $16.64 to $28.41
- Dividend: $1.15 which provides a yield of 6.7%
- 2012 Earnings Estimate: $3.16 per share
- 2013 Earnings Estimate: $3.22 per share
- P/E Ratio: about 5 times earnings
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VALE over the next 72 hours.