With the market consistently hitting new all-time highs, the best companies in the market are starting to look overvalued when compared to historical valuations. That said, there are some companies that still look undervalued, however they are not currently in favor with the market and have become slightly contrarian in nature.
So, here are three contrarian picks to help navigate the market in these uncertain times.
An unloved miner
The weakness in the silver market has provided a great opportunity to buy into Hecla Mining Company (NYSE:HL) and the company is now trading at its lowest valuation in 35 years.
Additionally, after the CAD$750 million acquisition of Aurizon Mining, funded from cash ($200 million saved over the past few years) and a $500 million debt issue, which was oversubscribed (Helca increased the initial $400 million issue by 25%), Hecla Mining Company (NYSE:HL) has increased shareholder equity by around 70%.
Moreover, Hecla has been building a steak in Brixton Metals Corp (CVE:BBB), a Canadian precious metals exploration company with a highly experienced management. Currently trading at $0.13 per share, Brixton Metals Corp (CVE:BBB) is cheap. The market, however, is not placing true value on the company’s exploration projects, which could be some of the best in the world with initial samples indicating grades of 7000 g/t Ag. Hecla’s slow acquisition of its holding in Brixton (20%) means that the company is not overpaying for some potentially game-changing reserves.
Hecla has plenty of room to churn out cash for shareholders in the future. Moreover, with a book value per share of $6.60, including the recent Aurizon acquisition, Hecla looks to offer significant value and the stock price could have reached a bottom.
A unloved Cat
Caterpillar Inc. (NYSE:CAT) has fallen out of favor with the market after well-known short seller, Jim Chanos, revealed that he had taken a position in the stock. Still, it would appear that after recent declines, the majority of the bad news is priced into the stock.
The company trades at a lower valuation than it did in 2008 and 2009, when the global economic outlook was considerably worse than it is now. On a EV/EBIT basis, the company trades at a ratio of 9.7x compared to the ratio of 10.6 for 2008 and significantly below its five-year average of 15. In addition, the company’s book value per share has rocketed from $11 in 2008 to $26.80 as of 2012. So, the price-to-book value is at its lowest in five years, 3.3x compared to the five-year average of 4.2x.
