5 Downtrodden Materials Stocks to Pick Up

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It is shocking to me how quickly market participants jump to conclusions. When fear rules the day, the smallest of missteps in the economy and management thereof by the Federal Reserve or the government, and down goes the market.

The latest example happened overnight. German GDP numbers showed that formerly strong economy to have stalled. Stocks in Europe fell, and futures in the U.S. were markedly lower.

Oh no, the sky is falling. Yawn …

This has been the theme in the market over the past several weeks. It is likely to be replayed over and over again. The significant amount of selling that comes with the fear has created numerous buying opportunities.

In the materials segment, many names are down significantly. Investors are projecting their doomsday scenario to this important part of the economy. The theory is simple: A double-dip recession will result in lower revenue and smaller profits or worse.

It’s a weak theory based on pure speculation. Are there problems in the economy? Yes, but that does not mean a recession is guaranteed. I put the odds of a recession at 25%, and the only reason it is that high is because the headlines of doom and gloom might result in a self-fulfilling prophecy. Take away the sensationalism in the way news is reported, and the odds of a recession drop to about 10%.

As such, I think now is a wonderful time to be buying materials stocks. These names have sold off significantly and likely will recover and thrive as the fog of fear is removed from the market. Here are the five names I would consider:

Alcoa

The aluminum giant reported earnings results July 11 that merely matched Wall Street expectations. Before the report was released, Alcoa (NYSE:AA) shares closed on July 8 at $16.38 per share. The market reacted negatively to the earnings news, but the last few weeks of selling hit Alcoa hard. The stock trades for $12.41 per share today.

In the days since the report was released, analyst estimates have come down, but only slightly. Prior to the report, the expectation was for Alcoa to make a profit of $1.33 per share for the current fiscal year. Today, the estimate is for the company to make $1.24 per share this year. Next year, that number increases by 15% to $1.43 per share.

At current prices, Alcoa trades for just 10 times current-year estimated earnings. I would buy the stock at these prices.

U.S. Steel

Steel is an integral part of the global economy. It is no surprise that stocks in the steel industry have sold off during the market correction. U.S. Steel (NYSE:X), already down significantly since peaking in mid-February, fell to $28.53 last week before recovering to today’s price of $31.25. At current prices, shares of U.S. Steel are down 46% this year.

I would say the worst of it already is priced into shares. Earnings estimates have been on the decline for most of the year. A 9 cent-per-share miss in the most recent quarter resulted in current-year expectations for profits to fall to $1.67 per share. Next year’s forecast is lower as well, but at a whopping $4.58 per share, it represents great value for buyers today.

The stock trades for just seven times 2012 estimates. This one is an easy one to buy here.

Universal Stainless & Alloy Products

Universal Stainless & Alloy Products (NASDAQ:USAP) is a specialty manufacturer of steel products that has been on an impressive roll. Shares had moved over 100% higher in the past 12 months before the market correction began in July. Those gains were fueled by impressive operating performance. In the most recent quarter, the company beat analyst estimates by 4 cents per share.

There is simply nothing in the numbers to suggest that USAP should be lower in value today. The selling is complete speculation of a dire future without any evidence to back it up. The strong production numbers in July suggest the strong performance will continue. For the full year, analysts expect USAP to make $2.53 per share. That number jumps 35% to $3.42 in 2012.

You can buy that impressive growth number for just 15 times current-year estimated earnings. I would suggest you do just that.

Mosaic

I really do try to understand differing points of view. The bearish case, while I might bash it from time to time, has some legitimacy. At any time, the world could indeed end, and stocks then would be worthless. My point is that, at any moment in time, you can have a doom-and-gloom story that just might materialize. Most times, these stories fall apart.

In the case of Mosaic (NYSE:MOS), I pretty much don’t care what the doom-and-gloom story says. We still have to eat, don’t we? Fertilizer demand will be there no matter what country defaults on its debts. Mosaic shares have been depressed already this year thanks to the selling of shares by Cargill. That excess supply of stock on the market resulted in lower prices to find buyers.

With the market correction of late, the stock is ridiculously cheap. Shares trade for just 11 times estimates of earnings for the fiscal year ending May 31, 2012. I would buy the stock at these levels, as the company should be able to grow profits by double digits as demand for improved crop yields generates sufficient demand for fertilizer.

Stillwater Mining

The strong industrial production numbers were boosted by impressive performance in the auto sector. That news should be viewed as a positive for palladium miner Stillwater Mining (NYSE:SWC). With the temporary blip in the sector caused by the Japanese earthquake, Stillwater is poised to do very well.

You couldn’t tell by recent stock action. Stillwater is down 12% since late July. Analysts expect the company to make $1.59 per share in the current year. In 2012, that number grows by 14.5% to $1.82 per share. At current prices shares of Stillwater trade for just nine times earnings.

Historically, buying stocks that trade for a multiple of earnings below the expected growth rate has been very profitable for investors. With that being the valuation metric for Stillwater, investors should buy shares at these levels.


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/5-materials-stocks-to-buy/.

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