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 l ong-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.
1. Adams Resources & Energy Inc. ( AE): Engages in marketing crude oil, natural gas, and petroleum products. Market cap at $228.19M, most recent closing price at $54.10.Diluted TTM earnings per share at 7.16, and a MRQ book value per share value at 35.39, implies a Graham Number fair value = sqrt(22.5*7.16*35.39) = $75.51. Based on the stock's price at $57.91, this implies a potential upside of 30.39% from current levels. P/E: 7.51. LTDebt/Equity: 0.00. 2. Apco Oil & Gas International Inc. ( APAGF): Operates as an oil and gas exploration and production company with a focus on South America. Market cap at $422.18M, most recent closing price at $14.27. Diluted TTM earnings per share at 1.35, and a MRQ book value per share value at 10.88, implies a Graham Number fair value = sqrt(22.5*1.35*10.88) = $18.18. Based on the stock's price at $14.47, this implies a potential upside of 25.63% from current levels. P/E: 10.57. LTDebt/Equity: 0.02.
3. Friedman Industries Inc. ( FRD): Engages in steel processing, pipe manufacturing and processing, and steel and pipe distribution activities in the United States. Market cap at $67.17M, most recent closing price at $9.87. Diluted TTM earnings per share at 0.71, and a MRQ book value per share value at 9.3, implies a Graham Number fair value = sqrt(22.5*0.71*9.3) = $12.19. Based on the stock's price at $10.07, this implies a potential upside of 21.04% from current levels. P/E: 13.90. LTDebt/Equity: 0.00.
4. The Mosaic Company ( MOS): Engages in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide. Market cap at $19.41B, most recent closing price at $45.64. Diluted TTM earnings per share at 4.42, and a MRQ book value per share value at 31.53, implies a Graham Number fair value = sqrt(22.5*4.42*31.53) = $56.0.
Based on the stock's price at $43.43, this implies a potential upside of 28.94% from current levels.P/E: 10.33. LTDebt/Equity: 0.00.
( List compiled by James Dennin, a Kapitall Writer. Analyst ratings sourced from Zacks Investment Research, EPS and BVPS sourced from Yahoo! Finance, all other data sourced from Finviz.)