As the trade war between the China and the U.S. continues, with Mexico suddenly being thrown into the mix, the stock market had a rocky month in May. Regardless, ETF Trends columnist Ian Young reported earlier this week that one industry appears to be holding up even as the overall market takes a beating: basic materials.
As a result, value opportunities may be found in the sector, which encompasses companies that are involved in the discovery, development and processing of raw materials like metals, minerals, chemicals and forestry products, among stocks that are trading below their Peter Lynch value.
Lynch, a renowned investor who generated an average 29.2% annual return while running Fidelity’s Magellan Fund, developed this method in order to simplify his stock-picking process. With the belief that good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a Premium feature, also looked for companies with a business predictability rank of at least two stars.
The screener found basic materials companies that met these criteria as of June 6 included Jewett-Cameron Trading Co. Ltd. (JCTCF, Financial), Olin Corp. (OLN, Financial), Reliance Steel & Aluminum Co. (RS, Financial), Minerals Technologies Inc. (MTX, Financial) and Celanese Corp. (CE, Financial).
Jewett-Cameron Trading
The North Plains, Oregon-based lumber company, which sells everything from fencing and pet products to greenhouses and tools, has a $28.29 million market cap; its shares were trading around $7.02 on Thursday with a price-earnings ratio of 12.11, a price-book ratio of 1.41 and a price-sales ratio of 0.65.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
Supported by comfortable interest coverage and no long-term debt, GuruFocus rated Jewett-Cameron’s financial strength a perfect 10 out of 10. In addition, the robust Altman Z-Score of 18.24 indicates the company is fiscally stable.
The company’s profitability and growth scored an 8 out of 10 rating, driven by margins and returns that outperform competitors and a high Piotroski F-Score of 7, which implies operating conditions are healthy. The business predictability rank of four out of five stars, however, is on watch as a result of Jewett-Cameron recording a slowdown in revenue per share growth over the last 12 months. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.8% per year.
With 4.75% of outstanding shares, Jim Simons' (Trades, Portfolio) Renaissance Technologies is the only guru invested in the company.
Olin
The specialty chemicals manufacturer, which is headquartered in Clayton, Missouri, has a market cap of $3.64 billion; its shares were trading around $22.02 on Thursday with a price-earnings ratio of 10.47, a price-book ratio of 1.32 and a price-sales ratio of 0.53.
According to the Peter Lynch chart, the stock is undervalued.
Olin’s financial strength was rated 5 out of 10 by GuruFocus, weighed down by poor interest coverage. In addition, the Altman Z-Score of 1.54 warns the company is at risk of going bankrupt.
The company’s profitability and growth fared better, scoring an 8 out of 10 rating. Although the operating margin is in decline, Olin is supported by strong returns on equity and assets, which outperform at least 63% of industry peers, steady earnings and revenue growth and a high Piotroski F-Score of 7. It also has a three-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 8.2% per year.
Of the gurus invested in Olin, Simons’ firm has the largest stake with 0.95% of outstanding shares. Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Arnold Schneider (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) are also shareholders.
Reliance Steel & Aluminum
Based in Los Angeles, the company, which supplies metal products to a wide range of industries, has a $5.77 billion market cap; its shares were trading around $85.85 on Thursday with a price-earnings ratio of 9.35, a price-book ratio of 1.21 and a price-sales ratio of 0.50.
Based on the Peter Lynch chart, the stock appears to be undervalued.
GuruFocus rated Reliance’s financial strength 6 out of 10. Although the company has issued approximately $23.4 million in new long-term debt over the last three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 3.87 also suggests the company is in good fiscal standing.
The company’s profitability and growth scored a 7 out of 10 rating. In addition to operating margin expansion, Reliance is supported by strong returns that outperform a majority of competitors, a moderate Piotroski F-Score of 6, which suggests business conditions are stable, and consistent earnings and revenue growth. It also has a three-star business predictability rank.
Royce is the company’s largest guru shareholder with 1.22% of outstanding shares. Other top guru investors are Pioneer, NWQ Managers (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Greenblatt, Steven Cohen (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Minerals Technologies
The New York-based company, which produces and sells a broad range of specialty mineral, mineral-based and synthetic mineral products, has a market cap of $1.97 billion; its shares were trading around $56.13 on Thursday with a price-earnings ratio of 11.79, a price-book ratio of 1.41 and a price-sales ratio of 1.10.
The Peter Lynch chart suggests the stock is undervalued.
Mineral Technologies’ financial strength was rated 6 out of 10 by GuruFocus. While the company has sufficient interest coverage, the Altman Z-Score of 2.52 indicates it is under some fiscal pressure.
The company’s profitability and growth scored an 8 out of 10 rating, boosted by an expanding operating margin, strong returns that outperform at least 55% of industry peers, regular earnings and revenue growth and a moderate Piotroski F-Score of 6. Minerals Technologies also has a three-star business predictability rank.
Of the gurus invested in Minerals Technologies, Royce has the largest stake with 4.38% of outstanding shares. Mariko Gordon (Trades, Portfolio), Gabelli, Hotchkis & Wiley, Greenblatt and Simons’ firm also have positions in the stock.
Celanese
The specialty chemical manufacturer, which is headquartered in Irving, Texas, has a $12.70 billion market cap; its shares were trading around $100.75 on Thursday with a price-earnings ratio of 11.33, a price-book ratio of 4.23 and a price-sales ratio of 1.90.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated Celanese’s financial strength 6 out of 10. Despite the company issuing approximately $980 million in new long-term debt over the last three years, it is at a manageable level due to comfortable interest coverage. In addition, the Altman Z-Score of 3.55 indicates the company is in good fiscal health.
The company’s profitability and growth scored a 7 out of 10 rating. In addition to operating margin expansion, Celanese is supported by steady earnings and revenue growth, strong returns that outperform competitors, a moderate Piotroski F-Score of 6 and a 2.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.
With 8.54% of outstanding shares, Dodge & Cox is the company’s largest guru shareholder. Other top investors include Pioneer, Simons’ firm, Private Capital (Trades, Portfolio), Ronald Muhlenkamp (Trades, Portfolio), John Buckingham (Trades, Portfolio), Bacon, Grantham, Greenblatt, Jeff Auxier (Trades, Portfolio), Jones, Scott Black (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio).
Additional investment opportunities
Other basic materials stocks that met the screener requirements as of June 6 included Westlake Chemical Corp. (WLK, Financial), Owens-Corning Inc. (OC, Financial), Eastman Chemical Co. (EMN, Financial) and Schweitzer-Mauduit International Inc. (SWM, Financial).
Disclosure: No positions.
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