The global financial crisis (GFC) was a reality check for many across the world. Within just a few months the realization that assets don’t continuously rise was suddenly and abruptly realized.
As with every cyclical shift from bull to bear market, the market overreacted. During the bull market prices overshot, assigning lofty and overly optimistic valuations to stocks. Similarly in the subsequent bear market that savaged the S&P500 by some 40+% overshot on the downside.
The great and legendary investor Sir John Templeton said, “bull markets are born in pessimism, grow in skepticism, mature in optimism and die in euphoria.”
Now 5 years after the crisis, many investors are in a very skeptical mindset with respect to valuations and earnings potential. The Dow has recently hit new highs and to a very large extent all we see is skepticism about the sustainability of the current market.
I think it is fair to say there is a very limited amount of optimism and little (if any) euphoria. With this in mind, I believe we are positioned for an ideal period of growth as the pervading sentiment is one of strong skepticism.
Specifically I believe the basic material sector is primed for renewed share price growth. This sector saw particularly brutal declines during the GFC. Since then the sector has struggled as companies have been challenged by the debt binge they went on prior to 2007.
However I think that the great majority of challenges and bearish headwinds have been factored into the prices of the three companies I have detailed below as my primary picks for playing a bullish recovery in the materials sector. Specifically, I believe there will be a bullish phase that will be driven by demand from India.
Alcoa Inc (NYSE:AA)
Alcoa has been the proverbial market pinata for some time now. Its share price has taken a major beating. After having hit a peak of over $40, Alcoa Inc (NYSE:AA) has declined nearly 80% to its current price of $8.62. Many pundits cite, the declining aluminum price and heavy debt burdens as the prime reasons for the decline. Perhaps this is true, what I am focused on though is Alcoa’s prospects moving forward.
I don’t believe the need for aluminum will go away anytime soon. What excites me about Alcoa Inc (NYSE:AA)’s prospects is the strong growth rate of India. With population growth expected to be nearly 20 million/ year for many years to come. India is poised to drive sustained demand for aluminum.