Two Stimulus Stocks: Texas Industries and Cliff Natural Resources

Includes: CLF, TXI
by: Sean Hannon

Great bear markets provide opportunities to buy stocks at unimagined levels. We already see many companies trading below book value and some trading below net cash. When this occurs, we take notice. Whereas two years ago Jim Cramer was advising people to buy overvalued stocks because they would keep going higher, we are now being begged to take shares that trade below liquidation value.

Believing we have yet to reach a permanent bottom, I will use future issues of my weekly newsletter EPIC Insights to highlight stocks that trade at large discounts to bet cash. This week I am focusing on a pair of companies that trade below book value, pay high dividends, and should benefit from the infrastructure rebuilding plans of the Obama administration-Texas Industries (NYSE:TXI) and Cliff Natural Resources (NYSE:CLF).

TXI is a supplier of construction materials such as cement, aggregate, and concrete. Since peaking above $79 in May 2008, the shares have sunk to a recent $13.69. At current prices, they trade at a P/E of 9, dividend yield of 2.19%, and 45% of book value. The stock is priced for a crash in economic activity and the assumption that earnings will never better their 2006 levels. Although construction spending currently is nonexistent, there is a government freight train heading down the tracks. As the recently passed stimulus bill invests in the improvement of infrastructure, the cost of concrete will surely rebound. With that rebound, TXI will have a strong underlying bid that will improve prospects. Buying the shares at these prices offers comfort of knowing that we are investing in a business well below its book value and that the earnings assumptions are conservative enough to prevent any future negative surprise. Although the government may take time to implement its actions, spending is coming and TXI will benefit.

CLF is a similar story. Since peaking over $119 in June 2008, the shares have slid to $13. As a large producer of coal and iron ore, CLF has been caught in the collapse of manufacturing and the imploding commodity bubble. But the sell-off appears overdone. At the current price, CLF trades at a P/E of 2, dividend yield of 2.7%, and 84% of book value. Fears over Obama's cap-and-trade system for carbon emissions have hurt the coal segment, while excess worldwide steel capacity has hampered the iron-ore business. However, even if CLF's revenue declined 70% and never rebounded, at current expense ratios the shares are still worth close to $15. At this level, the risk is stripped from this investment. As any rebuilding plan shall require great amounts of steel, CLF's prospects will brighten. Combine the need for iron ore with the expected "Buy America" campaign in Congress, and CLF offers tremendous upside potential.

TXI and CLF are perfect examples of how stocks passing from momentum traders to the broad market can create dislocation. While these prices collapsed, value investors steered clear as lower prices begot lower prices. Soon, however, the selling should stop.

These stocks offer everything I look for in an investment-value, income, and a clear business catalyst. I recommend a position in each as this week's fundamental trade.