The five basic materials stocks covered in this article are spiking higher today by an average of 10%. The sector has been hit with a triple whammy of good news today. The big news China is investing 150 billion in infrastructure coupled with the moves by the ECB and the increasing probability of the Fed implementing another round of QE due to the poor jobs report has sparked a rally in the basic materials sector.
According to a recent report by Reuters, "China has given the green light for 60 infrastructure projects worth more than $150 billion as it looks to energize an economy mired in its worst slowdown in three years, fueling hopes the world's growth engine may get a lift from the fourth quarter."
Moreover, it appears we may be at an inflection point. Often, this is precisely the time to pick up shares in out of favor stocks. The Dow has topped 13,000 and is trading at multi-year highs. The spike in gold is telegraphing the Federal Reserve, the ECB and other global central banks will provide further monetary stimulus which bodes well for basic materials stocks.
These five stocks may present buying opportunities at current levels. The stocks covered in this article have spiked recently. The stocks are trading on average 48% below their 52-week highs and have an average upside potential of 49% based on analysts' mean price targets. Furthermore, the stocks have recently bounced off multi-year lows yet trading vastly below multi-year highs with improving fundamentals.
In the following section, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table depicts summary statistics and Friday's performance for the stocks. The following charts are provided by Finviz.com.
Alpha Natural Resources, Inc. (ANR)
ANR was trading Friday for $6.79, up over 14% for the day. The company is down over thirteen fold from its 2008 high of $100.
It is trading 80% below its 52-week high and has 90% upside potential based on the consensus mean target price of $12.74 for the company.
Fundamentally, ANR has some positives. EPS for the next five years is expected to rise by 20%. ANR is trading for approximately one quarter of book value. Insider ownership is up 27% over the past six months and the company's sales are up 16% quarter over quarter. On the negative side, the company has a net profit margin of -36%; a negative ROE of -43.57% and EPS is dropping substantially quarter over quarter.
Technically, ANR seems to have found a short-term bottom at $7. The risk/reward ratio seems favorable at this point. This could be the biggest opportunity. Set a stop loss and layer in if you start a position. I like it here.
Peabody Energy Corp. (BTU)
Peabody was trading Friday for $23.34, up 9% for the day. The company is down almost three-fold from its 2008 high of $82.
The company is trading 52% below its 52-week high and has 40% upside potential based on the consensus mean target price of $32.75 for the company.
Fundamentally, Peabody has several positives. The company has a forward P/E of 8.23. Peabody is trading for 8.90 times free cash flow and slightly under book value. EPS next year is expected to rise by 26%. The company pays a dividend with a yield of 1.59%.
Technically, the stock has made the first move on its way to changing the trend. The stock still has a ways to go prior to confirming a trend change. Nonetheless, I like the stock here. It broke through resistance at the 50-day sma and kept on going.
Cliffs Natural Resources Inc. (CLF)
Cliffs was trading Friday for $39.26, up almost 13% for the day. The company is down over two-fold from its 2008 high of $110.
The company is trading 50% below its 52-week high and has 55% upside potential based on the analysts' consensus mean target price of $60.88 for the company.
Fundamentally, Cliffs has several positives. The company has a forward P/E of 4.46. Cliffs is trading for slightly less than book value. EPS next year is expected to rise by 29%. The company has a net profit margin of 24.43%. Cliffs pays a dividend with a yield of 7.17%.
Technically, Cliffs' situation looks bleak. The stock is definitely in a long-term down trend. All the major moving averages are sloping downwards. Even so, the stock recently did bounce off a multi-year low of 35 and has moved substantially higher. I would hold off on buying Cliffs until it tests $35 again. This one is facilitated by the $7% yield. Long term, I am bullish on the name, I like the stock at this level.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport was trading Friday for $39.39, up 9% for the day. The company is down less than one fold from its 2008 high of $60.
The company is trading 18% below its 52-week high and has 25% upside potential based on the consensus mean target price of $49 for the company.
Fundamentally, Freeport has several positives. The company has a forward P/E of 7.51. Freeport is trading for two times book value. EPS next year is expected to rise by 42.77%. The company has a net profit margin of 21.98% and an ROE of 20.38%. Freeport pays a dividend with a yield of 3.44%.
Technically, Freeport has been in a well-defined uptrend since mid-June. The low $30s seems to be an area of long-term support. Only once in the last five years has the stock breached this level and that was the 2008 low of the great recession. This is an ideal time to start a long-term position in Freeport.
United States Steel Corp. (X)
US Steel was trading Friday for $20.90, up 9% for the day. The company is down almost seven-fold from its 2008 high of $180.
The company is trading 35% below its 52-week high and has 37% potential upside based on the analysts' consensus mean target price of $28.57 for the company.
Fundamentally, US Steel has some positives. The company has a forward P/E of 7.04. US Steel is trading for 78% of book value. EPS next year is expected to rise by 76%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.
Technically, the stock has officially changed trend and is attempting to achieve a double bottom reversal pattern. The stock tested resistance at the $18 level twice over the past two months and needs to soar higher than the peak of $23 between the two troughs at $18 to fulfill the pattern. The stock is a strong buy here.
The Bottom Line
Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.
This little-known quote is credited to John Templeton. Sir John Templeton was a legendary investor who used a contrarian approach to investing. Templeton took contrarian investing to the extreme. Templeton stated contrarian investing wasn't simply investing against the grain but buying into companies hitting rock bottom or what he called "points of maximum pessimism." I would say these stocks definitely fit the bill.
I am calling this a bottom and inflection point for the basic materials sector. In trading Friday, shares of the iShares Dow Jones U.S. Basic Materials Sector Index Fund ETF (NYSEARCA:IYM) quickly reacted to the news out of China, Europe and the U.S. reversing trend and going positive Friday. iShares Dow Jones U.S. Basic Materials Sector Index Fund shares are currently trading up about 2.5% on the day. The chart below shows the performance of IYM shares for Wednesday.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in X, FCX, ANR, BTU, CLF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.