 |
By Bill Trent
RealMoney.com Contributor
6/17/2008 1:59 PM EDT
|
According
to a release from the Bureau of Labor Statistics, producer prices increased by 1.4% in May, hitting the high end of the range forecast by economists. Prices have risen 7.2% over the last 12 months.
For a stock picker like me, government economic reports are for more than just indicating the state of the economy. I like to examine the industry-level data to see if there are
specific industries to consider more closely as investment opportunities. This month's PPI report practically shouted out that investors should get back to basics. Basic materials, that is.
Perhaps surprisingly, high oil prices have not translated into terrific returns for petroleum refiners. The rising cost of oil has caused their input prices to go up as much, or more, than the output.
As a result, earnings estimates for the group have been slashed.
Valero
(VLO)
,
Frontier
(FTO)
,
Sunoco
(SUN)
and
Tesoro
(TSO)
are all down 40% or more over the last year, and it's no surprise why. In the last 90 days alone, Valero's earnings estimate for 2008 has been cut from $7.17 to $5.48. Similar stories are told by the other three companies listed.
Prices out of refineries, though have been rising rapidly for nearly a year. If the price increases can catch back up to commodity costs, margins should improve and the stock prices could have some catching up to do.
Another hot spot in the current PPI report is basic inorganic chemicals. The 38% year/year price increase in May is the largest in 10 years for the industry.
Celanese
(CE)
has certainly benefited from the trend. That stock is up 18.1%
since I wrote about it in April, while the
S&P 500 has been flat over that time. It still looks good to me, with strong earnings momentum, strong price momentum and high potential returns.
Other names in the sector that look interesting include
Airgas
(ARG)
,
Methanex
(MEOH)
,
Olin
(OLN)
and
Sigma Aldrich
(SIAL)
. With the exception of Methanex, they have all seen rising earnings estimates, and all have strong price momentum. Methanex, meanwhile, has a price/book ratio that is below the industry average, even though analysts expect the company to grow faster than the industry average.
Finally, in keeping with this month's basic-materials theme, iron and steel mills are also showing strong pricing power.
No surprise, then, that
Reliance Steel
(RS)
is up 17.4% since I wrote about it
in late April, compared to a 1.4% decline in the S&P 500 over the same time period.
Another steel stock that looks interesting these days is
Schnitzer Steel
(SCHN)
. Ninety days ago, analysts thought Schnitzer could earn $4.57 this year. After the company beat first-quarter estimates by nearly a quarter, the same analysts now think it can earn $6.03 this year and $6.87 in 2009.
While everyone else is out complaining about rising profits, I'll continue to try to profit from them. Thanks to these 11 stock tips courtesy of Uncle Sam, I have plenty of ideas to choose from.
RELATED STORIESDon't Ignore the DangerA Conservative Company That Goes to ExtremesAU Optronics Could Soon Display Solid Performance
