James Dennin, Kapitall: A report from Bloomberg suggests a huge upswing in commodities stocks ahead. So we decided to dig a bit deeper
It's been a bad couple of years for commodities stocks. Actually a bad 15 years to look more long-term, as that's how long Bloomberg's commodities index has lagged behind the rest of the S&P 500. This comes in part thanks to the slow down of China's development, which is no longer moving at a breakneck pace.
Read more on Raw Materials from Kapitall: Drill Baby Drill: 8 Cash Rich Energy Stocks
However, as economies across Europe and the Americas continue to improve, analysts expect that demand for raw materials will increase – potentially leading to higher profits. Analysts are projecting profits for commodities companies could as much as double over the course of 2014.But that's not the only reason investors are paying attention. After 15 years of underperformance, analysts are saying that many of these stocks are extremely undervalued as well. The largest copper manufacturer in the country, Freeport-McMoRan (FCX) has seen it's price-to-equity ratio decline 24% since 2010. With that in mind we decided to screen for commodities stocks that are undervalued relative to their Graham Number. Named for pioneer investor Benjamin Graham, the Graham Number is calculated by taking the square root of a company's Earnings per Share (EPS) and Book Value per Share (BVPS) multiplied by 22.5. A stock whose listed price is below its Graham Number might be said to be undervalued. Earnings per share is one of the most important variables that affects share price. It is determined by looking at net income divided by the number of shares a company sells, and is one of the most basic indicators of a company's profitability. A company's BVPS is a per share estimate of the company's equity. Though the Graham Number is a conservative estimate, and works better for smaller companies than it does for larger ones, it is a good way to isolate companies with a potential large upside. To further narrow our results, and make Benjamin Graham proud, we only included companies with low price to equity ratios (P/E) and low long-term debt-to-equity ratios (LTDebt/Equity). We were left with 4 companies on our list. Click on the interactive chart below to see data over time. Do you see investment opportunities among raw materials? Use the list below as a starting point for your own analysis.
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