I have selected five basic materials stocks I believe present buying opportunities at current levels. The stocks covered in this article are trading significantly below their 52 week highs and have significant upside based on consensus analysts' mean price targets. Furthermore, the stocks have above industry average profit margins and below average P/E ratios. These characteristics seem to imply the stocks are undervalued.
These five basic materials companies have above industry average profitability. A company's profitability is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its profitability and earnings information. Profits are used to pay dividends and give the company flexibility to invest in R&D and grow the company organically.
Additionally, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and guidance. All five have PEG ratios close to one, which is considered extremely undervalued. You have to buy low to sell high and these companies are down significantly. If the global economy takes a turn for the better these companies could see significant upside.
In the following sections we will take a closer look at these stocks to determine if the mean price targets are justified. We will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Friday's performance for the stocks.
Apache Corp. (APA)
Apache is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and has 37% upside potential based on the analysts' consensus mean target price of $117.35 for the company. Apache was trading Friday for $85.87, up over 1% for the day.
Fundamentally, Apache has several positives. The company has a forward PE of 7.39. Apache pays a dividend with a yield of .80%. Apache's current net profit margin is 24.27%. The company has a PEG ratio of 1.30.
I believe Apache presents a buying opportunity at this level. The stock is trading just above the $85 mark which has been long term support. The stock recently broke above the 50 day sma which is bullish. Most of the other four companies in this article beat earnings expectations and rose higher. Apache reports on August 2nd. I am considering starting a position prior to earnings. I posit they will beat lowered expectations as well.
Baker Hughes Incorporated (BHI)
BHI is trading somewhat below its consensus estimates, yet vastly below its 52 week high. The company is trading 41% below its 52 week high and has 11% upside potential based on the analysts' consensus mean target price of $52.07 for the company. BHI was trading Friday for $46.79, up almost 1% for the day.
Fundamentally, BHI has many positives. The company has a PEG ratio of .67 and is trading for slightly over book value. The company has a forward P/E of 11.01. EPS for the next five years is expected to rise by 20.23%. The company pays a dividend with a 1.29% yield as well.
BHI's stock has been on a downward slide since November of last year. The glut in natural gas prices along with the gloomy outlook from Europe has shellacked the stock. Nevertheless, the negative sentiment by analysts was overblown and the company blew away lowered expectations for the second quarter. A lot of companies are missing lowered expectations this earnings season, but not these stocks. UBS has seen the light and recently reiterated their Buy rating on the stock and upped their price target to $65. BHI just broke through resistance at the 200 day sma. I would wait a couple days to ensure it holds then start a position. The stock is a buy.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and has 53% upside potential based on the analysts' consensus mean target price of $49.79 for the company. Freeport was trading Friday for $32.55, up almost 2% for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 6.66. Freeport is trading for slightly less than two times book value. EPS next year is expected to rise by 40.58%. The company pays a dividend with a yield of 3.87% and has a net profit margin of 21.98%.
Freeport met expectations for the second quarter on revenues and beat expectations on earnings per share. According to the WSJ, Freeport is being pressured by the Indonesian government for a stake in their mining operations in the country. Freeport recently offered the Indonesian government a 9.36% stake in its Indonesia operations that run the Grasberg mine, the world's second-biggest copper mine. The government, which already owns 9.36% of Freeport Indonesia, is pushing for a greater share of mining revenues through higher royalties and new rules. I believe the coming turnaround in the prices of gold and copper will more than offset any stake Freeport has to relinquish to Indonesia. With Dragi's new strong stance on Europe, gold should start to rise as the dollar weakens in the face of a stronger Euro. This should benefit the bottom line of Freeport. I like the stock here.
Halliburton Company (HAL)
Halliburton is trading well below its consensus estimates and its 52 week high. The company is trading 26% below its 52 week high and has 31% upside potential based on the analysts' consensus mean target price of $43.27 for the company. Halliburton was trading Friday for $33.03, up over 2% for the day.
Fundamentally, Halliburton has some positives. The company has a forward PE of 9.47. Halliburton pays a dividend with a yield of 1.11%. Halliburton's expected EPS growth rate for next five years is 20%. The current net profit margin is 11.87%. Halliburton has quarter over quarter sales and EPS growth rates of 30% and 23% respectively. Halliburton's PEG ratio is .48.
I opened a position in HAL and am already up significantly. I am a Texas oil man and have an affinity for the old and respected company. HAL is one of the most respected oil companies in the business. Their expertise will always be in high demand. The stock is a buy.
Halliburton's Q2 earnings slipped but shares are up as analysts were bracing for gloomy results in the face of the global economic slowdown. Nonetheless, they were pleasantly surprised to see growth abroad and stability at home. "The international business overall is robust and growing," Barclays says. "The companies are now seeing good volume growth."
Schlumberger Limited (SLB)
Schlumberger is trading well below its consensus estimates and its 52 week high. The company is trading 22% below its 52 week high and has 19% upside potential based on the analysts' consensus mean target price of $86.24 for the company. Schlumberger was trading Friday for $72.29, up over 1% for the day.
Fundamentally, Schlumberger has some positives. The company has a forward PE of 14.09. Schlumberger pays a dividend with a yield of 1.54%. Schlumberger's expected EPS growth rate for the next five years is 18%. The current net profit margin is 12.41%. Schlumberger has quarter over quarter sales and EPS growth rates of 22% and 41% respectively. Schlumberger's PEG ratio is 1.04.
Goldman Sachs recently upgraded Schlumberger from Neutral to Buy with a price target of $95.00 (from $88.00). The firm said Schlumberger is uniquely positioned to benefit disproportionately from three major trends: (1) a pickup of international margins and pricing given increasing activity both onshore and offshore; (2) increases in Russian drilling activity, where SLB is particularly strong; and (3) an improvement in the global seismic market. I concur with Goldman, SLB is a buy here.
China and India are growing by leaps and bounds even though they may have slowed somewhat. They continue to increase strategic reserve stockpiles of basic materials. Couple this with Middle Eastern instability and the possibility of a second half rebound for the U.S. and Europe and you have a recipe for major profits in these stocks.
Things are not as bad as they seem. Even though some companies are missing earnings estimates for the second quarter, many are still growing. Now is the time to buy these out of favor basic materials stocks.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. You must determine if these investments are suitable for you. If you choose to start a position in any stock, I suggest layering in a quarter at a time to reduce risk and set a 5% trailing stop loss in order to minimize losses further if you wish.
Disclosure: I am long HAL.