Scavenging for Value Among the Unloved

 | May 20, 2013 | 4:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

mcp

,

chk

,

mt

A value-seeking investor who is willing to look in ugly places can find some interesting ideas. I haven't looked closely at these stocks recently, but I'm always intrigued when I find companies that are trading at prices that are fractions of what they once commanded. Call me a sucker, but if an asset trades at one-fourth or one-fifth of its previous high, you don't need that asset to be loved by Mr. Market the way it once was in order to earn an excellent return on your investment.

Molycorp (MCP) is the only major producer of rare-earth minerals in the U.S. These minerals include terbium, dysprosium and 15 others. The thing to know about these resources is that they aren't they rare but are rather vital to the products they go into. Also, the major suppliers today are China and, to a lesser extent, Russia. And China, for security and economic reasons, has been restricting its export quota to the U.S.

Strategically, it makes perfect sense for the U.S. to have a domestic supply of these materials. Molycorp hopes to do just that. Shares currently trade for $6.50, off from a 52-week high of $24. Two years ago, shares were trading for $74.

A more familiar name that may provide more comfort is Chesapeake Energy (CHK), the second-largest producer of natural gas after Exxon Mobil (XOM). Chesapeake just announced the hiring of a new CEO, who will assume the post in June. Natural gas has become much more abundant in the U.S. over the past five years, and as a result, the price has dropped from $12 per tcfe to around $4 today. Shares of Chesapeake have fallen from nearly $70 in 2008 to $20 today. Again, you don't $10 natural gas to make a lot money on Chesapeake. And since the U.S. is clearly the low-cost provider of natural gas, we are starting see companies pursue projects to export natural gas.

Furthermore, the cheap price of natural gas relative to oil (historically, natural gas has traded at a ratio to oil that ranges from 6 to 1 to 8 to 1; today the ratio is 24 to 1) is leading to construction of gas-powered facilities. All these factors point to a positive direction for the price of natural gas, even against the backdrop of increasing supply.

Steel is a widely hated commodity these days, and so are steel stocks. Add in exposure to Europe, and ArcelorMittal (MT) becomes a stock that no one wants to touch. Today, the stock trades at $12.90. Two years ago, the stock traded for $35, and before the recession, shares traded for over $100. At a $22 billion market cap, ArcelorMittal is the big gorilla in the industry. As the global steel market goes, so does ArcelorMittal.

For now, however, shareholders enjoy a 5.3% yield on the shares, and today's share price is an all-time low. That doesn't mean it can't head lower, and since the company has more than $2 billion in annual interest expense, the dividend is no guarantee. But ArcelorMittal is here to stay, and CEO Lakshmi Mittal is a seasoned executive who has weathered some storms. Tangible book value per share exceeds $22

Even a "bad" asset can be a fantastic investment compared with a "good" asset, depending on the price. Investing in ugly places requires more work, but the payoff can be exponentially more lucrative.

Columnist Conversations

CHECK IT OUT HERE Lot's of great out and underperformer picks, as well as M&A ideas that you don't always ...
The major market indices continue to move within the parameters of the Fibonacci retracement levels measured o...
Since we cleared a key decision on the way up, I want to watch this pullback for an entry if it fires off a bu...
Conclusion DDD is down today on new that the firm has cut revenue forecast due to production issues. The issue...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.