This has been a great year for stock investors. The S&P 500 has outperformed any and all forecasts offered up by analysts (not that they’re ever very accurate, mind you), and the index is on track for a 30% gain on the year. It seems that just about everything has worked so far this year. Earnings growth or a lack thereof hasn’t mattered, nor has revenue growth or valuation levels.
Companies with no earnings such as Tesla (TSLA) and Wynn Resorts (WYNN) have seen their stock price soar this year. Hot social media stocks like LinkedIn (LNKD) and Facebook (FB) trade at massive valuations and have moved higher in spite of very small profits relative to valuation. Money has poured into equities in search of a return in a world of low interest rates, pushing almost all stock prices higher in the past year.
With that in mind, let’s take a look at a stock that has been beaten down in 2013 and could be poised for a huge breakout in 2014.
One of the more intriguing stocks on the list of nonperformers is Metalico (MEA). The company operates in three segments: The Scrap Recycling business collects and processes ferrous and non-ferrous metals, and collects industrial and obsolete scrap metals to process into reusable forms. Metalico then sells the product to customers like arc furnace mills, metals brokers and aluminum smelters. The Minor Metals Recycling segment recycles platinum group metals, including platinum, palladium, and rhodium from the substrate material retrieved from catalytic converters. It also recycles other metals such as molybdenum, tungsten, tantalum, niobium, rhenium, and chrome. Lastly, the Lead Fabricating makes lead products that are sold to the construction, radiation shielding and power generation industries.
MEA stock has been punished because business has been pretty horrible for most of the past few years. As the economy has struggle to gain traction the demand for the company’s products simply hasn’t existed, and MEA has had to take impairment charges against many of its assets as the market price of the metals plummeted. The stock is down about 10% this year and sells at about 10% of the pre-crisis levels. The stock is now under $2 as they have struggled to turn a profit.
There strong signs that things are about to change. The US economy is slowly starting to strengthen, which is great news for MEA. The company said in its most recent earnings release that scrap metal supplies are tightening and prices are starting to improve, and the company expects these conditions to be in place throughout 2014. MEA also expects demand and pricing for aluminum to improve somewhat in 2014. Absent impairment charges, the company turned an operating profit in the past quarter for the first time in several quarters. Management is also refinancing the company’s outstanding debts and recently retired a $37 million convertible bond issue.
If metals prices do improve somewhat in 2014 this single-digit stock could become one of 2014’s top performing stocks. A pickup in the steel, aluminum and lead markets could send sales, earnings and the stock price soaring back towards the old highs over the next few years. Management is highly motivated to guide the company back to a profitable path as insiders own about 13% of the company. MEA stock currently trades at about 90% of book value and about 15% of sales, making it very cheaply valued.
The stock is something of a longshot, and depends heavily on continued economic recovery, so treat it only as a speculative play. But if those factors materialize, the upside could be tremendous.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.