With oil prices falling and other commodity prices at epic lows, Wall Street has become very negative about many energy and materials companies. However, we don't always agree with what Wall Street says. So we asked a few of our analysts which stocks on Wall Street's naughty list they like, and why you might want to reconsider what Wall Street has to say about these companies.
Maxx Chatsko: Few investments will be as boring as those in the pulp and paper industry, but boring is usually a good thing in investing. Although the Great Recession forced major changes and consolidation within the industry and expedited the closure of less efficient pulp mills, the major players capitalized on the opportunity to divest unprofitable assets and invest in the future.
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Take, for instance,Domtar. The company sank to 40-year lows in early 2009 before catapulting 1,000% just one year later. It paid its first-ever dividend three months after that.
How's Domtar doing today? It trades for an embarrassingly low price-to-earnings ratio of 6.3, and boasts a dividend yield of 3.6%. Unfortunately, Wall Street is and has been preoccupied chasing riskier growth stocks in the current low-rate environment. That will change when the Fed raises interest rates -- perhaps as early as 2015 -- and investors will realize share gains in addition to the market-beating quarterly income Domtar generates.
This isn't a dead-end investment, either. A focus on operating efficiency (low maintenance costs and a good balance of inventory and demand), innovative products, and developing future growth streams such assuper strength materialsoffer glimpses of a promising future. It may be relatively boring, but Domtar shareholders can quietly realize steady, long-term gains from both income distributions and share appreciation.
Matt DiLallo:Frack sand producerEmerge Energy Services LP went from a Wall Street darling to one of the most hated energy stocks thanks to the plunge in oil prices. That's just what happens when the stock chart goes like this:
Investors really hate this stock right now, which is borne out by the fact that 64.9% of the company's units are sold short. These investors think the company's units are going to keep heading lower, despite the fact that the company's business hasn't changed one bit.
Emerge Energy Services business is bolstered by two important features. First, its sand capacity is already 87% contracted under long-term, fixed-price contracts. These contracts will help it weather any short-term storm in the oil industry. Further, the longer-term trend is that producers are using more sand per well as this is yielding better well economics. That's a key feature when prices are plummeting, as more economic plays will continue to see investment.
With a yield that's currently just over 12% and backed by long-term contracts, Emerge Energy Services is a compelling value and income play. While it might continue to sell off until oil prices find a bottom, the fact remains that there's a lot of value in its contract certainty. That value makes it worthwhile to at least put the stock on your radar to buy when things settle down.
Tyler Crowe: I will admit that I'm taking a big risk on this one. Even though more than 38% of the shares in Cliffs Natural Resources are sold short, I'm still bullish on the company and the long-term prospects of the stock. It all comes down to what is at the core of Cliffs: its U.S. iron ore mining operations.
When people think of iron ore mining today, most people think of the major global players with mines in Australia and South America. Do you know how much mining those big guys have in the U.S.? Zero. More than 60% of all iron ore mined in the United States is mined by Cliffs, and much of that iron ore is sold to American steel manufacturers under long-term contracts at slightly higher than global prices because of the lower transportation costs and higher iron ore quality. While much of the mining world is reeling from the abysmal prices for iron ore, this segment has remained both a positive earnings- and free cash flow-generator for Cliffs.
Yes, there were several missteps taken by Cliffs' former management regarding expansion into Canada and its metallurgical coal investments. But new CEO Lorenco Goncalves is looking to shed all of these unprofitable segments to focus on the profitable core. It might take a while to get there, and the company will need to manage a slightly bloated balance sheet along the way, but the price for shares of Cliffs today (85% of current assets such as cash, accounts receivable, and inventory) makes it hard to resist taking at least a flyer on this company.
The article Value Stocks to Buy: 3 Companies Wall Street Hates, but We Love originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. Maxx Chatsko has no position in any stocks mentioned. Tyler Crowe owns shares of Cliffs Natural Resources. The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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