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Two Basic-Materials Stocks on Sale

Quarter-end is one of my favorite times. It is when fund managers are forced to dump their holdings in sectors that have sold off during the quarter, in a ritual called "window dressing." It is a great time for patient investors to pick up some deep bargains as managers throw out the baby with bathwater in order to avoid reporting their "clunkers" to their shareholders.

I have found that picking up these temporarily unloved stocks in poorly performing sectors and then waiting for them to bounce back is one of the key ways to outperform the market in the long term.

The materials sector has had a rough 90 days in the aggregate, as it is down some 10% on the whole in the quarter, and many individual stocks have suffered losses that are multiples of the average. Most of the pullback was caused by concerns about slowing worldwide economic growth and reduced demand from end users.

Here are two dirt-cheap companies in the sector that have taken a licking in the last three months but should rebound in the quarters ahead. Also, both have had recent insider buying at levels higher than their current stock prices.

Kronos Worldwide (KRO - Get Report) produces titanium dioxide pigments primarily in North America and Europe.

Here are five reasons Kronos is a deep long-term bargain at $16:

  • Insiders have stepped up and bought more than a million new shares since the first of the year, a majority of which were purchased at higher prices.
  • The company pays a robust dividend yield of 3.8%. This should put a major floor under the stock, and it is easily sustainable, given that the dividend payout ratio is just a tad over 20%.
  • The company has crushed earnings estimates each of the last two quarters, and consensus earnings estimates have risen for both fiscal 2012 and fiscal 2013 over the last two months, even as the stock has fallen by about one-third during that same time span.
  • The market is ignoring the company's growth prospects. Sales are expected to rise more than 25% this year and more than 10% in fiscal 2013, and the stock has a five-year projected price-to-earnings-to-growth ratio (PEG) of under 1 (it's at 0.78).
  • Kronos sells for just over 5x forward earnings, and the stock is selling at the very bottom of its five-year valuation range, on the basis of price to earnings and price to cash flow.

U.S. Silica Holdings (SLCA - Get Report) produces and sells various commercial silica and industrial mineral products.

Here are four reasons U.S. Silica will reward shareholders who buy it under $11 a share:

  • Several insiders purchased new shares at higher prices in May.
  • In its first two quarters as a public company, U.S. Silica has blown by earnings estimates, and it trades at just 5x forward earnings.
  • Investors are not pricing in the company's growth prospects. Sales are expected to grow north of 25% for both fiscal 2012 and fiscal 2013. It also has a minuscule five-year projected PEG (0.19).
  • The stock is ridiculously under analysts' price targets. Only four analysts cover the stock, and their targets range from a low of $24 to a high of $28 a share, all significantly above the current stock price.
At the time of publication, Jensen was long KRO and SLCA.

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