The big news that China is investing 150 billion in infrastructure coupled with the moves by the ECB and the Fed sparked a rally in the basic materials sector. The five basic materials stocks covered in this article are spiking higher recently on the developments.
Subsequently, many names in the sector have pulled back after AK Steel (AKS) and U.S. Steel (X) received downgrades by JPMorgan. JPMorgan stated the recent pop in these stocks was due to short covering and it doesn't think steel fundamentals will support a continued move higher.
The question is if they don't think these stocks can move higher then why are the price targets still vastly higher than current prices? Their new price targets for AK Steel and U.S. Steel are $7.00 and $29.00 respectively. This implies AK Steel still has 27% upside and U.S. Steel has 39% upside. The downgrades don't make sense to me.
I see the pull backs as a buying opportunity. The conspiracy theorist in me would say it seems like shorts try to keep certain names down until they are able to unwind their positions and go long. A lot of people were talking about the downgrades but no one really mentioned the fact that the target prices still provide significant upside. Even so, there may be other complications that may hinder some of these stocks performances going forward.
These five stocks may present buying opportunities at current levels. The stocks covered in this article have spiked recently then pulled back after a series of downgrades. The stocks are trading on average 35% below their 52-week highs and have an average upside potential of 24% 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 Tuesday's performance for the stocks. The following charts are provided by Finviz.com.
Alcoa, Inc. (AA)
The company is trading 18% below its 52-week high and has 13% potential upside based on the consensus mean target price of $10.72 for the company. Alcoa was trading Tuesday for $9.46, down over 1% for the day.
Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.77. Alcoa is trading for 24 times free cash flow and 75% of book value. The company pays a dividend with a yield of 1.25%. Alcoa's projected EPS growth rate for next year is 188.46%.
Technically, the stock had been in a short-term uptrend since mid-July. The stock just broke out to the upside in a parabolic move since the start of September. The stock has pulled back in recently, yet the 50 and 20 day smas remain in an upward trend.
Alcoa is down fourfold from its 2008 high of $40. If you are a long-term investor, this could be a chance to pick up Alcoa near its lows. Eight dollars seems to be the bottom for this stock. The stock has pulled back to 2% above its 200 day sma. I see this as an excellent buying opportunity.
AK Steel Holding Corporation
The company is trading 46% below its 52-week high and has 19% upside based on the consensus mean target price of $6.57 for the company. AK Steel was trading Tuesday for $5.47, down over 1% for the day.
AK Steel has some fundamental positives. The company has a forward P/E of 8.51. AKS is expecting EPS to more than quadruple next year. The company trades for 10% of sales. EPS for the next five years is projected to be 22%.
Technically, the stock has been in a well-defined trading range for the last few months. The stock has moved between a high of $6.50 and low of $5 since June. The stock recently broke through major resistance at the 50 day sma. It continued higher then pulled back to the 50 day sma after the recent downgrade.
The company is down over tenfold from its 2008 high of $70. AK Steel recently warned of a larger than expected Q3 loss as it contends with lower average per-ton selling prices. AKS cited lower spot market prices for carbon steel products because of declining global economic conditions. The stock has taken a severe hit. The news is now priced in to the stock. I see this as a buying opportunity here.
Cliffs Natural Resources Inc. (CLF)
The company is trading 44% below its 52-week high and has 33% upside potential based on the consensus mean target price of $56.63 for the company. Cliffs was trading Tuesday for $42.24, slightly down for the day.
Fundamentally, Cliffs has several positives. The company has a forward P/E of 5.89. Cliffs is trading for slightly less than book value. EPS next year is expected to rise by 35%. The company has a net profit margin of 24.43%. Cliffs pays a dividend with a yield of 5.90%.
Technically, Cliffs is definitely still in a long-term down trend. Nonetheless, all the major moving averages are starting to change the angle of decent.
The company is down over two-fold from its 2008 high of $110. The stock recently bounced off a multi-year low and has moved substantially higher smashing through the 20 and 50 day smas. The $5.90% yield makes Cliffs very palatable. Long term, I am bullish on the name, I like the stock at this level.
Freeport-McMoRan Copper & Gold Inc. (FCX)
The company is trading 14% below its 52-week high and has 19% upside potential based on the consensus mean target price of $49.21 for the company. Freeport was trading Tuesday for $41.15, down almost 1% for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 8.57. Freeport is trading for 2.37 times book value. EPS next year is expected to rise by 43.32%. The company has a net profit margin of 21.98% and an ROE of 20.38%. Freeport pays a dividend with a yield of 3.02%.
Technically, Freeport has been in a well-defined uptrend since mid-June. The stock has gone parabolic like most of the other stocks on this list after the Fed announced a new round of QE was forthcoming. The recent pullback is healthy for the stock technically.
This is an ideal time to start a long-term position in Freeport. They are big producers of both copper and gold. The company is down significantly from its all-time highs and has reacted well in periods where QE has been implemented. The stock is a buy here.
United States Steel Corp.
The company is trading 35% below its 52-week high and has 36% potential upside based on the analysts' consensus mean target price of $28.36 for the company. US Steel was trading Tuesday for $20.62, down over 3% for the day.
Fundamentally, US Steel has some positives. The company has a forward P/E of 7.81. US Steel is trading for 87% of book value. EPS next year is expected to rise by 77%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.
Technically, the stock failed at its first attempt 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 company is down almost seven-fold from its 2008 high of $180. The stock's recent pullback was related to the downgrade by JPMorgan. I see this as a chance to get into the stock before things start to turn around. The stock is a buy here.
The Bottom Line
We have been in the midst of a colossal sell-off of basic materials stocks based on unprecedented macroeconomic and geopolitical trepidations. 2008's so called Great Recession's only peer seems to be the Great Depression of the 1930s. This has created some tremendous buying opportunities in the space.
I posit the basic materials sector is at an inflection point. The spike in gold telegraphs the Federal Reserve, the ECB and other global central banks will provide further monetary stimulus boosting these stocks' bottom lines. These stocks reacted quickly jumping sharply higher regarding the news out of China, the ECB and the Fed. Now they have pulled back for a pause and refresh cycle. This is precisely the time to start a position. The initial pop is a tell that macro-economic and geo-political conditions are beginning to favor these names.
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.