The stocks covered in this article are the top five best performing mid-cap or better basic materials stocks in the S&P 500. The five stocks are up by an average of 53% for 2012. QE or no QE, these stocks have performed amazingly this year. CF Industries Holdings, Inc. (NYSE:CF) is up the most this year with a return of 72.18%. Valero Energy Corporation (NYSE:VLO) is up the least with a gain of 29.09% year to date. A majority of the gains for most of these stocks has been in the third quarter, which leads me to believe rotation from safe dividend paying stocks into the basic materials sector is underway.
Furthermore, several macro events have occurred spurring these stocks even higher. The news China is investing billions in infrastructure to stimulate their economy coupled with the positive steps taken by the ECB and the Fed mulling over implementing QE due to the poor jobs report has sparked the recent rally.
Finally, these stocks are all bona fide turnaround stories at various points in the process. They all have catalysts for future growth. Three are energy related, while two are agricultural. The question is: is now the optimal time to buy?
These five stocks may present buying opportunities at current levels. The stocks are trading on average 10% below their 52-week highs and have an average upside potential of 13% based on analysts' mean price targets. So they are trading at closer to their recent highs. In this case, I see this as a positive. The often quoted axiom "The trend is your friend" comes to mind, and the trend is definitely up.
Furthermore, most of the stocks are trading vastly below multi-year highs. The stocks are set up extremely well heading into a seasonally favorable period for the sector. China implementing an infrastructural stimulus package will increase demand for basic materials driving profits higher. Simultaneously, the central banks around the globe are implementing QE providing a substantial tailwind for these names. I posit these two actions will have a synergistic effect on the stock's performance as well. The candle is being burned at both ends, so to speak.
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 Tuesday's performance for the stocks. The following charts are provided by Finviz.com.
CF Industries Holdings, Inc.
CF is up 47.27% YTD and 27.72% for the past quarter. CF is trading up 45% since the day of my initial recommendation in January. Currently, the company is trading 3% below its 52 week high and has 10% potential upside based on the analysts' mean target price of $234.23 for the company. CF closed Tuesday at $211.37 down slightly for the day.
CF still has some fundamental positives. CF's forward P/E is 8.66. The EPS growth rate is up 38% quarter over quarter. The company trades for 7.38 times free cash flow, pays a dividend and has a PEG ratio of .74. Finally, the company is highly profitable with a net profit margin of 30.48%.
Technically, the stock looks good. I am changing my position and see this as an excellent buying opportunity here. The stock has bounced off support at the bottom of the trend channel. This is an ideal time to start a position. As always, I would layer in to any position in tranches.
Monsanto Co. (MON)
Monsanto is up 39.81% YTD and 14.23% for the past quarter. Monsanto is trading up 29% since the day of my initial recommendation in January. Currently, the company is trading at its 52 week high and has 5% potential upside based on the analysts' mean target price of $93.89 for the company. Monsanto closed Tuesday at $89.50, up slightly for the day.
Monsanto has some fundamental positives. Monsanto's forward P/E is 21. The company's net profit margin is 16.19%. The ROE is 17.94%. The company pays a dividend with a yield of 1.68%. EPS is growing by 36% quarter over quarter.
Technically, the stock has been on fire since mid-May. The stock recently pulled back and bounced off the 50 day sma. This was a good test of support and allowed the stock to relieve pressure with a back and fill move. I like the stock here. If you are concerned with buying at the 52 week highs, set a trailing stop loss order on the stock to reduce downside risk.
Marathon Petroleum Corporation (MPC)
Marathon is up 60.42% YTD and 39.22% for the past quarter. Marathon is trading up 28% since the day of my initial recommendation in June. Currently, the company is trading 1% above its 52 week high and has 13% potential upside based on the analysts' mean target price of $59.90 for the company. Marathon closed Tuesday at $53.35, up 2% for the day.
Fundamentally, Marathon has many positives. The company has a PEG ratio of 1.44 and is trading for 1.72 times book value. The company has a forward P/E of 7.22. EPS is up substantially this year. The company pays a dividend with a 2.67% yield and has an ROE of 25.54%.
Technically, the stock is performing extremely well. The stock has been on a tear since the start of June posting higher highs and higher lows. I say stick with this winner.
Tesoro Corporation (TSO)
Tesoro is up 60.42% YTD and 39.22% for the past quarter. Tesoro is trading up 70% since the day of my initial recommendation in June. Currently, the company is trading 3% below its 52 week high and has 25% potential upside based on the analysts' mean target price of $50.24 for the company. Tesoro closed Tuesday at $40.31, up nearly 1% for the day.
Fundamentally, Tesoro still has many positives. The company trades for 6.26 times free cash flow. Tesoro has a forward P/E of 8.20. The company pays a dividend with a yield of 1.20%. The company trades for 1.36 times book value and EPS are up 80% quarter over quarter.
The stock seems to be consolidating after having had a parabolic move over the past month. I would give it another week to see if it holds up at this level prior to starting a position.
Tesoro's West Coast Empire was cemented by a recent deal to buy out BP Inc. (NYSE:BP). Tesoro has contracted to buy BP's Carson plant for $2.5 billion, forming the largest U.S. oil-refining empire in the Pacific Basin. Combine this development with the potential asset monetization in the second half of 2012 to early 2013, and you have a recipe for further gains. I did not start a position in this stock in June. If I had, I would take some profits now, but continue to hold a core position in the stock.
Valero Energy Corporation
Valero is up 55.06% YTD and 47.42% for the past quarter. Currently, the company is trading 1% above its 52 week high and has 11% potential upside based on the analysts' mean target price of $36.27 for the company. Valero closed Tuesday at $32.77, up over 2% for the day.
Fundamentally, Valero has some positives. The company trades for 18 times free cash flow. Valero has a forward P/E of 7.20. The company pays a dividend with a yield of 2.19%. The company trades for 1.07 times book value and EPS is up 1265 this year.
Technically, the stock looks great. The stock has been in an orderly uptrend since June. The coveted golden cross was achieved at the beginning of August where the 50 day sma crosses above the 200 day sma. This is one of my key buy indicators.
Everyone else can write articles about what a great company and value Valero is, but it is my hometown stock. I live in San Antonio, Texas, the home to Valero. I can't help but root for my hometown company. Valero has several positive catalysts for future growth and has performed very well since the start of the year. I rode the stock from $16 to $26 and I'm looking to get back into the stock on any pullback. As usual, I sell my winners too soon and my losers too late.
The Bottom Line
U.S. Basic Materials Sector stocks quickly reacted to the news out of China, Europe and the U.S. showing the propensity of market participants to rotate out of risk off safe haven stocks into risk on stocks. This has occurred at the end of the past two summers as well.
In trading over the last week, 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. iShares Dow Jones U.S. Basic Materials Sector Index Fund shares are currently trading up about 6% on the week. The chart below shows the performance of IYM shares for the past five days.
Chart Provided by Yahoo.com
Even though most of these stocks have already had great runs, don't hold that against them. They are moving higher for good reason and the tailwinds just got vastly stronger. Still, take your time building a position. One of the major factors affecting your potential return in a stock is your cost basis.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VLO, TSO, CF, MON, MPC 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.