Deep Value Stocks in Basic Materials (AA, ACI, DOW, DVN, NUE, STLD, BRK-A)

Print Email

The markets are currently shaky and investors are looking for cover.  While many seek defensive stocks and while many seek high dividends to offer equity exposure with some safety, one area that always attracts certain investors is a targeted value stock from sector to sector.  The basic materials sector is generally very cyclical, so this is when individual picks actually matter in times of uncertainty.  We did run analysis on the sector to look for companies which stand out from their peers when it comes to price-to-book value: Alcoa, Inc. (NYSE: AA); Arch Coal, Inc. (NYSE: ACI); The Dow Chemical Company (NYSE: DOW); Devon Energy Corporation (NYSE: DVN); Nucor Corporation (NYSE: NUE); and, Steel Dynamics Inc (NASDAQ: STLD).

While most “book value” companies are trading at discounts for a reason, we only focused on the basic materials players which may actually grow through these uncertain times.  Each company offers an implied earnings growth scenario.  For next year, analysts expect healthy earnings growth ranging from Alcoa’s 14% to Arch Coal’s 56%.  We also only took companies that have lower price-to-earnings ratios ahead as well to filter out the companies in trouble.  Average trading volume for each of these companies exceeds one million shares daily.

We would also note that each of these shares is currently lower than the prior day’s close due to the global selling that has been seen.  That changes things only marginally, and value investors may get to see yet even more value as a result.  Except where otherwise noted, the source for all performance and financial data is

Alcoa, Inc. (NYSE: AA) boasts a price to book value of roughly 1.1, clearly best among this list of companies.  Its market cap is $16.4 billion.  Its forward P/E is 9.6.  Analysts look for next year’s earnings to top current year net by 14%. With a Thomson Reuters consensus target price of $19.95 per share, Alcoa has an implied upside of close to 30%.  In trading Wednesday, Alcoa’s shares closed at $15.29, down 0.52%.  The 52-week trading range is $9.73 to $18.44.

Here is what investors need to consider about Alcoa.  Investors always try to use this company as the first read each earnings season to make a determination about companies in general but they also use it to analyze the entire metals sector.  Alcoa has telegraphed growth and recovery ahead, even if it has a spotty record around earnings.  Alcoa has also been called a takeover target by some investment watchers. Alcoa peaked around $45.00 back in 2007 before the recession.

Arch Coal, Inc. (NYSE: ACI) is tricky because it recently closed upon its acquisition of International Coal.  That throws a wrench in the machine, but we still wanted to show what the core company value is.  Arch sports a price to book ratio of roughly 1.9 and its market cap is $5.5 billion.  Its forward PE is less than 7, ranking it the best in this list of companies.  Analysts expect next year’s earnings to exceed current year earnings by more than 55%, the best expected earnings expansion among these six companies. Again, keep in mind that analysts often are extremely late to the party when it comes to interpolating other earnings into a merger mix.

With a Thomson Reuters consensus target price of $39.76, Arch Coal has an implied upside of more than 50%.  In Wednesday trading, Arch Coal’s shares closed at $25.84, down 0.69%. The 52-week price range is $18.81 to $36.86.  The merger will undoubtedly change the values and the outlook ahead and it is possible that the value here may change since the aggregate value of the merger was about $3.4 billion.  We still wanted to show this as the cheap buyer.