Screening for Value Stocks in Commodities (CLD, MOS, NEM, CVX, KOL, POT, GDX, XOM, COP)

We have recently begun filtering out value stocks in a sector by sector screen ahead of earnings season.  This latest batch is a commodities value screen, and we identified three clear value picks in coal, agriculture, and gold mining.  We also identified a winner in the integrated oil giants as a bonus for a fourth pick rather than just having three picks.  Cloud Peak Energy Inc. (NYSE: CLD), Mosaic Co. (NYSE: MOS), Newmont Mining Corp. (NYSE: NEM) were our three initial picks, and Chevron Corp. (NYSE: CVX) is the current winner of the three US-based integrated oil giants.

In each case, we have identified stock performance, some color on each company, relative value metrics, and more in a very simple format.  All can easily be hedged with options.  Most important is that there is an element in each of these that may appeal to other types of investors other than just ‘value investors.’  We tried to pick apart silver, rare earth elements, lithium, and others, but in most cases these stocks are either up massively or they are not US-based.

Cloud Peak Energy Inc. (NYSE: CLD) is far from a household name and many investors consider the Montana and Wyoming coal producer a new company that came public in late-2009.  It is actually a special situation as it was formerly a unit of Rio Tinto and its coal is aimed mostly for electric power plants.  Many investors prefer sexier coal plays, but the low dollar value of the company at $1.3 billion is small enough that any of the larger players wanting a Western U.S. presence could decide that Cloud Peak needs to be acquired. 

While many coal companies trade with relatively low P/E ratios, this one trades at less than 10-times a blended 2011-2012 earnings model.  There is currently no dividend but that may change in the near future.  Some investors shy away from carve-outs and spin-offs, but we love being able to evaluate these special situations before and after the dust settles.  At $21.75, the 52-week trading range is $12.82 to $24.69; Analysts are currently very mixed too on Cloud Peak but Thomson Reuters has a mean consensus price target objective above $26.00 with an implied upside of 20% in the next year.  The stock has also lagged the Market Vectors Coal ETF (NYSE: KOL) in the run of the last 3 months and 6 months.

Mosaic Co. (NYSE: MOS) may be less followed than Potash Corp. of Saskatchewan (NYSE: POT) and it may not have been the subject of a broken buyout, but its valuation speaks for itself.  The crop nutrient player is in phosphates and potash in a field with fewer and fewer key players as more of the world is trying to eat more each day.  It is also riddled with a huge share overhang for an investor concern as Cargill holders may soon be unloading more than one-third of the company as it divests itself of the majority stake.  This giant stake sale has likely acted as a drag and an overhang on shares despite its performance.

Mosaic is guilty of the same low dividend yields as other agriculture and commodity players with a paltry 0.3% yield, but that $0.05 per quarter payout has been the same since 2008 and could easily be raised ahead. This one trades at about 16-times a blended 2011-2012 earnings model and has a market cap of $35 billion. At $78.41, its 52-week trading range is $37.68 to $89.24. Mosaic shares actually hit above $150 at the peak of the 2008 Ag-Bubble. Thomson Reuters has a mean consensus price target of about $87.00, implying close to 11% upside.

Newmont Mining Corp. (NYSE: NEM) just completed is $2+ billion acquisition of Fronteer Gold Inc.  The company may not have the absolute lowest P/E ratio and it may not have the absolute lowest cost of production per ounce of every gold miner, but it has enough diversity at lower production costs and so much room for profits that it is the single largest dividend in the gold sector. Its target dividend of $1.00 per year is based upon the current price of gold and it gets close to 2% in yield.  That yield is unheard for a gold miner.  Thomson Reuters sees revenues north of $10 billion for this year and next, and if gold remains here then there is significant upside room for earnings and revenues surprises. 

The stock trades at about 13.5-times a blended 2011-2012 earnings model.  It is also able to commit to a higher dividend if it chooses down the road and it trades at about two-times its real book value.  With shares just under $58.00, its 52-week range is $50.05 to $65.50.  After it raised production outlook and dividend, shares may have a performance premium in the last week but Newmont offers value, income, and growth that caters to most investors today.  Shares have lagged behind the Market Vectors Gold Miners ETF (NYSE: GDX) for the lest 3 months and 6 months and it almost seems as though the run in silver has taken away from much of the interest in gold.  Analysts also have a price target north of $73.00, implying more than 25% upside even on the back of a solid performance the week before.

Chevron Corporation (NYSE: CVX) has some mix of momentum in this value call against Exxon Mobil (NYSE: XOM) and ConocoPhillips (NYSE: COP).  This is not as clear of a winner in value screening because if you ask three portfolio managers which of the big-three US integrated players offers the best value then you’ll get three different answers.  It is not the cheapest on every metric that there is, but it is also never the most expensive of the three integrated oil players.  Because analysts have no real long-term forecasting success in oil earnings, we only used 2011 expectations as we are at multi-year highs in oil.  We also admit right up front that the stock has been hitting new highs, so much of the ‘value’ has already been taken by prior investors.

At $109.66, the 52-week trading range is $66.83 to $109.94 and its market cap is $220 billion. This 52-week high is actually also an all-time high.  Chevron trades at only about 9.3-times the 2011 estimate of $11.78 from Thomson Reuters.  It also trades at about 2.2-times tangible book value and investors have been treating it as the favorite of late. The dividend is currently in the middle of the integrateds at 2.6%, but that has been static for what has been four quarters in a row and we think it will rise ahead even further.

Having the term “value” does not keep losses from happening.  Commodities move in directions and the underlying stocks behind each often follow the commodity trend more than real value trends.  It is the nature of the beast but we wanted to find some which have lower values compared to peers. 

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JON C. OGG