These 4 Cheap Commodity Stocks Could Be Poised For A Strong Rebound

Includes: AA, CLF, MEA, VALE
by: Trade In Mexico

Recently, concerns about the global economy and demand from China have put significant pressure on many metal and commodity stocks. While the econony in Europe could remain weak, the recent banking crisis in Cyprus has not resulted in a worst-case scenario. Also, on April 9, the Chinese Government reported inflation data, which was significantly lower than expected. That could clear the path for more economic stimulus programs in China, which would be likely to boost demand for metals and other commodities. A recent Businessweek article states that this is positive for metals and other commodities.

Now let's take a look at some stocks that have experienced a recent pullback and now look too cheap to ignore. These stocks have short-term rebound potential and even more upside in the long run.

Metalico, Inc. (NYSEMKT:MEA) is a leading metals recycler with facilities located in Alabama, California, and Illinois. Metalico processes lead, aluminum, molybdenum, tungsten and tantalum. It also processes and recycles catalytic converters from vehicles, which contain valuable metals such as platinum, palladium and rhodium.

This stock appears neglected, which has led to a bargain basement valuation. This is a highly cyclical business and the stock price tells that story well. These shares regularly traded over $6 in 2010 and 2011. Before the financial crisis in 2008, this stock even went to over $16 per share. Today, it even trades below book value, which is around $3.79 per share. Plus, it has annual revenues of nearly $600 million. That is equivalent to about $12 per share in revenues. In good years, this company has significant earnings power. For example, it reported earnings of 37 cents per share in 2011, 53 cents in 2007, and 45 cents in 2006.

In 2012, Metalico invested $23 million in capital expenditures, and this impacted results. However, it made long-term improvements by upgrading its facility in Elizabeth, New Jersey, and it made improvements to its shredders and replaced cranes, rebuilt balers and shears. This concluded a two-year expansion in capital expenditures, and management expects capital expenditures to be lower in 2013.

Reduced expenses and upgraded processing abilities means this company could be poised to report better-than-expected profits going forward. Furthermore, since this company buys scrap metals, it can re-align its cost basis much more quickly than a company that only makes metal from raw materials. That is another reason why the sell-off in this stock is overdone.

Just a few weeks ago this stock was trading over $2. However, it seems to have been unfairly sold off along with many major metal stocks. Now, the stock looks like a oversold bargain that could be poised for a rebound. At just around $1.50, investors might want to buy a few shares for short-term rebound potential. However, this stock could be poised for much larger long-term gains since it did formerly trade around $16. While I don't expect it to hit that level anytime soon, even a fraction of that level would create big gains. I see no reason why this stock can't trade back to around book value of $3.79.

Alcoa, Inc. (NYSE:AA) is one of the world's largest aluminum companies. This and other metals that Alcoa produces is used in many consumer goods and the aerospace, automobile, construction, and energy industries. This stock was trading around $9.30 earlier this year, and before the financial crisis it regularly traded for over $30 per share. A recent pullback to about $8.30 per share makes this a good time to take another look at this undervalued stock.

This stock may have some upside potential in the short term, but investors with a longer-term view might see the biggest gains. Alcoa recently reported solid financial results. For the first quarter of 2013, net income rose to $149 million, or 13 cents a share. This was an improvement when compared to results of $94 million, or 9 cents, a year earlier. However, revenues declined 3% to $5.83 billion from $6.01 billion, a year ago. According to the CEO, the outlook for 2013 is positive and he projected 7% growth in aluminum demand.

Alcoa shares appear undervalued and it trades well below book value, which is $12.32 per share. Analyst Tony Rizzuto at Dahlman Rose has set a $13 price target for the stock. With the shares trading just around $8, that appears to give investors significant upside, although this is probably going to take time to achieve.

Cliffs Natural Resources (NYSE:CLF) is a leading producer of iron ore and coal. These industries have been challenging because there has been reduced demand for both of these basic commodities. Iron ore is used to make steel and coal is used as fuel. In the past several years, China has been a major buyer of both iron ore and coal, but the growth has stalled in the past year or so and that has created a glut of inventory for these resources. This has resulted in lower prices.

One issue for coal has been the low price of natural gas. That's because many utilities can and have switched from coal to natural gas. However, natural gas prices have been rising in the past couple of months and that could help the outlook for coal. Furthermore, many coal mines have been idled in recent months and that could boost prices in the future as the supply and demand ratio gets more balanced.

Cliffs is a low-cost producer and it has the financial resources to ride out the challenges facing the coal and iron ore industry. It also has significant earnings power when coal and iron ore prices are not at depressed levels. For example, Cliffs reported earnings of $11.48 per share for 2011. As of late, the outlook for earnings has not been as strong and that has driven this stock down from over $100 in 2011, to just about $18. However, investors might be selling this stock too cheap now.
Analysts at JPMorgan (NYSE:JPM) recently turned bullish on Cliffs and set a $40 price target. That would give investors a potential double from current levels.

Vale S.A. (NYSE:VALE) is a leading producer of iron ore. This company is based in Brazil and that is a plus since that country is rich in natural resources. The abundance of iron ore in Brazil makes Vale a low-cost producer and global exporter. China has increasingly been a big buyer of iron ore over the past few years, but in the past few months or so, the growth has slowed. Weaker demand from Europe has also been an issue. These factors have contributed to excess supply which has put pressure on iron ore prices. However, demand from China is not likely to stay down for too long, and the sell-off in the stock appears to be a buying opportunity. This stock looks undervalued. For example, analysts expect the company to earn $2.39 per share for 2013. That puts the price-to-earnings ratio at just 7.5 times earnings.

Jim Cramer of CNBC recently called Vale shares a buy and other analysts have also turned bullish. Goldman Sachs (NYSE:GS) recently stated that iron ore prices could rise and that Vale shares are undervalued. It set a price target of $29.30 for Vale, and suggested the company could be poised to raise the dividend in 2013. Vale already sports a dividend yield of about 4.5%. This should keep investors happy while waiting for a higher share price. With the shares trading at just around $18, there appears to be upside of about 50%, if the stock hits the price target of $29.30.

Data sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MEA, 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.