Bank of America delivered a contrarian statement on Wednesday, saying it anticipates stocks to outperform bonds in the coming quarters. Moreover, the bank says it prefers cyclical assets over defensive ones, with financial, basic materials and energy stocks at the core of the banking giant's watchlist.
According to Bank of America's investor note: "We still prefer stocks to bonds, and within equities, we would avoid long-term growth stocks in favor of high free cash flow yielding cyclicals/beta... Our recommended overweighted sectors skew higher beta: Financials, Energy, and Materials."
Bank of America's Brave Call
There is no doubting the fact that Bank of America made a brave call, seeing as many analysts are worried about a possible deflationary environment, which could wreck cyclically derived earnings. Nevertheless, many cyclical stocks, especially basic material stocks, are oversold with robust long-term prospects.
If your thinking is aligned with Bank of America's outlook, then here are three cyclical stocks worth considering.
Teck Resources Ltd (TECK, Financial)
Teck Resources Ltd (TECK) is a Canadian multinational mining company with operations spanning base metals and energy. The company is a hot topic at the moment as Glencore PLC (LSE:GLEN, Financial) is targeting its coal business.
Glencore PLC (LSE:GLEN, Financial) has lodged a bid and believes it can acquire Teck's steelmaking coal business for approximately $2 billion. If the deal is completed, the divesture could allow Teck to reposition itself toward a renewable energy economy while enhancing its balance sheet.
Teck's Robust Operations and Divestment News
In addition to Teck's divestment news, the company possesses robust operations across the board. In fact, its second-quarter earnings report communicated stealth as the company delivered $643 million in net profits accompanied by cash flow from operations of $1.1 billion.
Much of the company's recent success stems from its substantial market share in steelmaking coal, as visible in the diagram below. Moreover, its significant pipeline of copper assets located in the Americas has or is likely to provide sustainable cash flows for years to come.
Source: Teck Resources Ltd (TECK, Financial)
Teck's Free Cash Flow Growth Rate
Teck Resources Ltd (TECK, Financial)'s three-year average free cash flow growth rate of 445% speaks volumes, concurrently complementing Bank of America's screening process, which includes strong free cash flow stocks with cyclical attributes. In addition, the stock is trading at a price-book ratio of merely 1.1 and possesses a dividend yield of 1.78%, conveying the stock's compelling total return prospects.
Anglo American Platinum Ltd (ANGPY, Financial)
Anglo American Platinum Ltd (ANGPY), otherwise known as Amplats, is the world's largest platinum miner by value, and its stock has not been this affordable in a very long time. Numerous events, such as a change in CEO and systemic issues in South Africa, resulted in investors overselling the stock, as displayed by the relative strength index numbers below.
Amplats' Long-term Outlook
Although Amplats has sustained severe year-to-date losses, key indicators suggest the stock might be at its cyclical bottom. More importantly, the company and stock alike are supported by a bright long-term outlook.
Anglo American Platinum Ltd (ANGPY, Financial)'s value proposition stems from its access to the South African bushveld complex, which hosts approximately 70% of the world's platinum group metals. Moreover, the company mines shallower mines than most of its counterparts and has access to bulk ores. Combined, the aforementioned factors contribute to a best-in-class Ebitda margin as a lean labor force and high-quality ore amalgamate into a highly profitable business model.
Overlooked Short-term Catalysts for Amplats
I believe two overlooked short-term catalysts for Anglo American Platinum Ltd (ANGPY, Financial) exist. First, the company's development of the middelaagte assets within Anglo's Amandelbult complex is set to bolster production to between 110,000 and 180,000 tonnes per month and lower the complex's all-in sustaining costs even further.
The second overlooked factor is support for Platinum Group Metals prices by means of the "green hydrogen economy."
I consider the latter point a short-term catalyst as the energy crisis in 2022 provided a firm reminder of global energy supply shortages. The global populous is growing exponentially, and Amplats' industry stronghold suggests it will be one of the primary material suppliers to energy producers in the coming years.
Amplats' Total Return Prospects
According to Amplats' latest price multiples, its stock is trading at merely 6.34 times its earnings while providing investors a dividend yield of approximately 10.65%. As such, the stock's salient metrics imply that it has solid total return prospects.
Sibanye Stillwater Ltd (SBSW, Financial)
Sibanye Stillwater Ltd (SBSW) is a diversified metals miner with a platinum group metals-centric approach. In addition to its platinum endeavors, the company mines gold tailings via its majority ownership of DRDGold Ltd (DRD, Financial), deep gold through its Beatrix and Kloof mines and is exploring for lithium in Finland.
Sibanye's Commitment to the Green Economy
Many believe Sibanye Stillwater Ltd (SBSW, Financial) is central to the renewable metals space. The company was initiated through a spinoff from Gold Fields Ltd (GFI, Financial) and soon transitioned into a global platinum producer and supplier. Moreover, many believe it is fully committed to the green economy, as its lithium exploration via its Keliber project in Finland shows. In addition, management has hinted at a Sibanye-Mopani Copper Mines acquisition, which would provide the company with high-quality copper and cobalt to enhance its pivot into green materials.
Popularity of Sibanye's Stock
To illustrate the growing popularity of Sibanye Stillwater Ltd (SBSW, Financial)'s stock, Scion Capital's Michael Burry (Trades, Portfolio) recently initiated a long position. A recent 13-F filing shows he acquired 800,000 shares, which is a sizable position in today's uncertain market environment.
Sibanye's Profit Margins
Similar to Teck Resources Ltd (TECK, Financial) and Anglo American Platinum Ltd (ANGPY, Financial), Sibanye Stillwater Ltd (SBSW, Financial) possesses robust profit margins, illustrated in the diagram below. As such, the stock trades at only 4.12 times its earnings and maintains a dividend yield of 8.75%.
Final Word
Bank of America's bullish call on cyclical stocks might come as a surprise to many. However, a deeper dive into the data suggests lucrative opportunities exist since many cyclical stocks are in undervalued territory.
Qualitative analysis paired with quantitative metrics suggests the likes of Teck Resources Ltd (TECK, Financial), Anglo American Platinum Ltd (ANGPY, Financial) and Sibanye Stillwater Ltd (SBSW, Financial) provide solid total return prospects. Although the aforementioned assets are risky bets, their long-term potentials are best in class.
