Deep Value Names Could Reward Patience

I find the current market environment quite challenging. Equities feel either fairly or slightly overvalued at 16x to 17x forward earnings in light of a lack of clarity around global growth and with margins in the S&P 500 near all-time highs. Growth and momentum stocks that led the market higher in 2013 have come down quite a bit since their decline began in early March but still are not bargains. The blue chips that have outperformed the market in 2014 like Microsoft (MSFT) and Apple (AAPL) are still reasonably priced but not nearly as cheap as they were to begin the year. This leaves me more interested in some of the deep value stocks which have not participated in any rally in quite some time. Below are a couple of cheap names where sentiment is probably near a trough and which could award patient value investors. KBR, Inc. (KBR) operates as an engineering, construction, and services company worldwide. It has a growing hydrocarbons business that constructs large liquefied natural gas and gas-to-liquids facilities. The stock has been a long-term underperformer but the equity is now priced at just over long-term technical support at current levels after falling by a third over the last few months. In its last quarterly earnings report, KBR significantly lowered guidance. The company also has had 18 straight quarters of declining revenues but recently brought in a new CEO that should bring in much needed change. In short, I believe the sentiment on this infrastructure and energy play is close to being as negative as it is likely to get. With the reduced guidance, the shares are more than reasonably valued at 12X to 13x forward earnings. The stock also sells for just over 7x peak earnings per share in 2011. It is even cheaper given it has over $1 billion in net cash, or about 30% of the current market capitalization on its books. The company recently initiated $350 million stock repurchase program that would retire more than10 percent of its float at current price. Given that competitor Foster Wheeler (FWLT) recently was acquired at a nice premium as well as increasing M&A activity, a buyout is not out of the question. The stock also pays a small dividend of 1.4%. Global Brass and Copper Holdings (BRSS) is a value-added converter, fabricator, distributor and processor of specialized copper and brass products in North America. The company engages in metal melting and casting, rolling, drawing, extruding and stamping to fabricate finished and semi-finished alloy products from processed scrap, copper cathode and other refined metals. It is the market leader in almost all of its niche markets. Like so many IPOs in the last year, this company was a hot stock in its initial foray into the public markets last year, but has given up most of those gains. At its current price of just over $15 a share, it is very cheap at approximately 7.5x trailing earnings and 3x earnings before interest, taxes, depreciation and amortization. The shares have come down from a post IPO high of approximately $21 a share, partly on concerns about a slowing housing market. This is a core end market and represents nearly 30% of overall sales. The housing market was impacted earlier in the year by higher mortgage rates and horrid winter conditions throughout the country this year. Now that rates have dropped a bit and spring has arrived, building activity should improve. Probably the closest comparison to Global Brass among public companies is Mueller Industries (MLR) which trades at 9.5x trailing earnings and more than double Global Brass's EBITDA to price ratio. Now that lockups are over from the IPO and the housing market is entering a historically-strong season, this stock seems poised to move higher.

Deep Value Names Could Reward Patience

Sentiment is near a trough in some of these stocks.

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