Domestic materials stocks have endured a drubbing of almost 30 per cent year to date and yet two of the biggest risks for the sector – a significant emerging markets growth slowdown and the removal of U.S. Federal Reserve monetary stimulus – have been either overblown or delayed.
A sell-off combined with declining risks makes this an ideal time to search for investment value in the sector and thankfully, Globe Investor has just released a new suite of stock screening tools to do just that.
Cash flow is king when filtering through mining stocks (earnings can be distorted by depreciation and other factors) so after loading the materials sector into the new Globe Investor Screener, I first sorted them all by trailing 12-month price-to-cash flow (not shown).
Then I took the cheapest stocks based on cash flow and ranked them by forward price-earnings ratios (based on analyst estimates). The accompanying table shows four stocks that stood out: Centerra Gold, Barrick Gold, Rio Alto Mining and Teck Resources.
At 4.3 times forward earnings estimates, Centerra Gold is dead cheap and holds $316-million in cash to weather any further declines in the bullion price. The analyst community is extremely bullish on the stock – the average target price of $7.31 implies a 12-month return of more than 80 per cent – despite an ongoing dispute between the company and the Kyrgyzstan government.
The fallout from Barrick Gold's slow-moving $3-billion bought deal is obscuring how cheap the stock really is.
The current price of $19.08 represents a mere 7.1 times next year's earnings, which is less than half of the S&P/TSX Composite Gold (Sub Industry) Index sector average of 16.1. Analysts, possibly waiting for changes in Barrick's management structure, have a relatively conservative price target of $22.40 that predicts upside of about 25 per cent.
Teck Resources remains well-positioned to benefit from re-acceleration in Chinese economic growth and broad emerging markets development, which has been far more resilient than many pundits predicted.
Teck's forward price-earnings ratio is admittedly a bit rich at 16 times. Recent analysis in ROB's Inside the Market, however, uncovered that the company's stock is trading well below the value implied by the commodity prices – coal, copper and zinc – that it produces (tgam.ca/DwLj). In the most recent quarter the company posted profits well ahead of estimates, which suggests that analyst expectations may be low.
Rio Alto is the smallest and most speculative of the four picks with a market cap of less than $300-million. The higher-risk nature of the stock is reflected in the extraordinarily cheap trailing price-to-cash-flow multiple of less than four times and an average target price, at $3.74, more than double the current stock value. Rio Alto has the most upside potential, but volatility is likely and only investors with strong stomachs should commit serious portfolio assets to this one.
There are, as always, company-specific risks involved with each of the four stocks. Management remains an issue at Barrick, China's efforts to curb pollution might affect Teck's coal operations, and local political and regulatory issues surround Centerra's Kyrgyzstan properties and Rio Alto's Peruvian assets.
Nonetheless, the screener has provided ample indication of investment opportunity and strong reasons for further research.
Looking for mining bargains
Fwd P/E Ratio
Avg 12M Target Price
Implied 12M Rtn %
Rio Alto Mining
Source: Globe Investor