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:
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.
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.