Basic material stocks such as Rowan Companies PLC (NYSE:RDC), Allied Nevada Gold Corp. (NYSEMKT:ANV), and Alcoa Inc (NYSE:AA) have not been rewarding to investors in recent months even though the markets have scaled new heights. However, it may be a good time to go long in these stocks as the U.S. economy has started giving signals that the worst is behind us.
Rowan Companies’ strong indicator
Texas-based Rowan Companies PLC (NYSE:RDC) offers offshore contract drilling services to oil explorers and producers. At a current market price of $34.40, the stock is not exactly beaten down, but a forward price earnings ratio of 9.4 and an 8 percent discount to book value are strong indicators that the stock trades at somewhat discounted valuations. With one of the youngest rig fleets, it is no wonder Rowan’s profit margins are ahead of the industry average. Rowan’s specialty remains in shallow water but it has recently moved into the deep water environment.
Although Rowan Companies PLC (NYSE:RDC) is a fairly diversified player geographically, a focus on shallow water operations was seen as a limitation. Now with the prospects of its rigs operating in the Gulf of Mexico and in West Africa in future, the company should see a boost in its profit margins. Analysts at Barclays have an Overweight rating on the stock with a price target of $40.
Allied Nevada: Gold down but recovering
Gold is not a commodity that many people are willing to touch now and this applies to Allied Nevada Gold Corp. (NYSEMKT:ANV) as well. From a high of $41, the stock saw a low of $5.34 in the last year alone, capping a 72 percent decline over the last 12 months. But the situation is changing now as a double digit run up over the last month suggests. Solidifying the company’s case for a reversal is also a debt equity ratio of 0.86 which allows the company to take advantage of recovering gold prices.
At a forward price earnings ratio of 6.2, the stock is a screaming buy and even though most brokerages are giving it an Underperform rating, Allied Nevada still gets a double-digit price target. Despite the gloom, the company managed to post 34 percent growth in the quantity of gold and silver sold during the latest quarter. As prices are recovering, this trend could lead to an earnings surprise in the coming quarter.
Aluminum down too but a turnaround may be in offing
Alcoa Inc (NYSE:AA) is one of the largest producers of aluminum in the world and yet its stock trades at a 34 per cent discount to book value of $11.9 per share. At current price of $8.1, the stock comes at a premium of just 5.8 percent to its 52 week low and at a forward price earnings ratio of 15.1. The last few months have not been good for the stock as it gave up gains following a poor quarterly report. In reality, the company continues to work through a difficult phase that has led to an oversupply situation in the global aluminum market.
However, the fact that the company is still profitable says a lot about the efforts its management has made in cutting costs and excess capacity. A look at its balance sheet over the last years tells Alcoa Inc (NYSE:AA) has been consistently reducing its debt levels even though profitability has been inconsistent. The company was recently downgraded to junk status by Moody’s Corporation (NYSE:MCO) but the fact remains that Alcoa is one of the biggest players in the space and will benefit immensely when the market recovers. With the U.S. economy well on track to a solid recovery and the Eurozone also showing some life, it may not be long before we see a turnaround in the aluminum market.
This may be a good time to start nibbling in these stocks as there are increasing signs that we are out of woods. While Rowan Companies PLC (NYSE:RDC) looks to offer an immediate upside, it may take longer for Allied Nevada Gold Corp. (NYSEMKT:ANV) and Alcoa Inc (NYSE:AA). Nevertheless, both the latter stocks represent opportunities too attractive to miss.