China announced it would invest 150 billion in infrastructure a month or so ago. Tuesday, according to data from The Steel Index Ltd., iron ore for immediate delivery in China rose 6 percent to $110.40 a ton, the biggest gain in a month. This news coupled with the quantitative easing and stimulus actions by the ECB, Fed and many other central banks has sparked a rally in the basic materials sector. The five basic materials stocks covered in this article are spiking higher Tuesday on the developments.
These five stocks may present buying opportunities at current levels. The stocks covered in this article have spiked recently. Yet, the stocks are still trading on average 51% below their 52-week highs and have an average upside potential of 30% based on analysts' mean price targets. Furthermore, the stocks have recently bounced off multi-year lows yet are trading vastly below multi-year highs and have 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.
AK Steel Holding Corporation (AKS)
The company is trading 48% below its 52-week high and has 18% upside based on the consensus mean target price of $6.27 for the company. AK Steel was trading Tuesday for $5.35, up nearly 5% for the day.
AK Steel has some fundamental positives. The company has a forward P/E of 8.36. AKS is expecting EPS to nearly triple next year. The company trades for approximately 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 and is now testing resistance at the 50-day again.
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. The risk/reward is favorable at this point. I see this as a buying opportunity.
Alpha Natural Resources, Inc. (ANR)
ANR is trading 76% below its 52-week high and has 49% upside potential based on the consensus mean target price of $10.60 for the company. ANR was trading Tuesday for $7.16, up over 5% for the day.
Fundamentally, ANR has some positives. EPS for the next five years is expected to rise by 20%. ANR is trading for approximately one third of book value. 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. The company is down over thirteen fold from its 2008 high of $100.
Set a stop loss and layer in if you start a position. The stock just broke out above the long-term downtrend channel. I like it here.
Peabody Energy Corp. (BTU)
Peabody is trading 50% below its 52-week high and has 35% upside potential based on the consensus mean target price of $31.81 for the company. Peabody was trading Tuesday for $23.76, up nearly 5% for the day.
Fundamentally, Peabody has several positives. The company has a forward P/E of 11.21. Peabody is trading for 9.41 times free cash flow and slightly over book value. EPS for the next five years is expected to rise by 14%. The company pays a dividend with a yield of 1.50%.
Technically, the stock looks good. The stock changed trend in August and is now in an uptrend. I like the stock here. It broke through resistance at the 50-day sma and kept on going.
The company is down almost three-fold from its 2008 high of $82. The recent rise in natural gas prices bodes well for the coal sector. If Romney wins the election, this will be a homerun.
Cliffs Natural Resources Inc. (CLF)
The company is trading 46% below its 52-week high and has 26% upside potential based on the consensus mean target price of $52.19 for the company. Cliffs was trading Tuesday for $42.00, up 3.5% for the day.
Fundamentally, Cliffs has several positives. The company has a forward P/E of 6.80. Cliffs is trading for 92% of book value. EPS next year is expected to rise by 20%. The company has a net profit margin of 24.43%. The company has an ROE of 24.31%. The company currently pays a dividend with a yield of 6.16%.
Technically, Cliffs looks like it hit an inflection point at the beginning of September marking a trend change. All the major moving averages are starting to change the angle of decent and flatten out somewhat.
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 significant dividend yield combined with the fact the stock is near 52 week lows makes this a buying opportunity in the name.
United States Steel Corp. (X)
The company is trading 36% below its 52-week high and has 24% potential upside based on the analysts' consensus mean target price of $25.79 for the company. US Steel was trading Tuesday for $21.17, up nearly 4% for the day.
Fundamentally, US Steel has some positives. The company has a forward P/E of 9.13. US Steel is trading for 83% of book value. EPS next year is expected to rise by 55%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.
Technically, the stock looks good. The stock tested resistance at the $18 level four times over the past few months and recently broke through resistance at the 50-day sma.
The company is down almost seven-fold from its 2008 high of $180. I see this as a chance to get into the stock before things start to really turn around. The stock is a buy here.
The Bottom Line
A colossal sell-off of basic materials stocks based on unprecedented macroeconomic and geopolitical trepidations has occurred over the last four years. 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. These stocks reacted quickly jumping sharply higher regarding the news out of China, the ECB and the Fed. The initial pop is a tell that macro-economic and geo-political conditions are beginning to favor these names. I believe we are at a major inflection point.
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.