If you’re a value investor, you can pat yourself on the back, because most people aren’t cut out to handle your style. It seems easy enough, right? All you have to do is find a stock out of favor, and then buy low and sell high. Of course, if it was that easy I wouldn’t need to write this, nor would you be reading. The truth is that value investing is difficult and can often take years for the gains to pan out — something investors have a hard time waiting for. If you can be patient enough, I think both Devon Energy Corp (NYSE:DVN) and AK Steel Holding Corporation (NYSE:AKS) will reward investors. Here are some reasons to be bullish.
Devon Energy Corp (NYSE:DVN)
Devon Energy Corp (NYSE:DVN) has an asset base that includes both oil and natural gas plays in the U.S. and Canada. Its recent change in strategy was to shift its focus to U.S. and Canadian assets and sell off its deepwater and international plays. Starting late in 2009, the company sold nearly $10 billion in assets, which has led to a very strong balance sheet.
I believe this was a great decision, but the market hasn’t realized it yet, leaving Devon’s stock price undervalued. What’s more is that Devon Energy Corp (NYSE:DVN)’s portfolio includes a balanced mix of short- and long-term asset plays, providing sustainable growth.
Short-term growth will be driven by a handful of its oil assets, including its sizable position in the Permian Basin that drove a 23% year-over-year increase in Devon Energy Corp (NYSE:DVN)’s U.S. oil production. Morningstar projects Devon’s average daily production to more than double in the Permian over the next four years, which will contribute nicely to the company’s growth.
Devon’s first quarter didn’t set the headlines on fire, but its liquid plays produced impressive results and continue to improve. In the first quarter, Devon added 20 new wells to its Bone Spring oil production, and construction is 60% complete on its third Jackfish oil sands project. While Devon Energy Corp (NYSE:DVN) focuses on oil-rich plays, its solid balance sheet will provide the needed cushion while natural gas prices remain low.
Right now the stock looks fairly cheap and trades at a price-to-book ratio of 1.2 compared with the industry average 1.8. If natural gas prices improve, it will provide a positive catalyst to boost Devon Energy Corp (NYSE:DVN)’s stock price — rewarding investors.
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AK Steel Holding Corporation (NYSE:AKS) is the second company I think is undervalued. It operates seven steelmaking facilities in the United States, and its products are mainly used in the automotive, construction, and machinery sectors. The largest market for steel products in the U.S. is the automotive industry, which represented 36% of AK Steel Holding Corporation (NYSE:AKS) sales in 2011 — the most recent available data by market.
