The basic materials sector is under-performing the overall market. As the S&P 500 rises 4.2% for the month and 15% in 2013, a number of companies in the resource sector are in the red. Unsurprisingly, analysts as a whole are bearish on some of the weak players. The target prices of companies in this sector were lowered, with the most notable changes listed in the table below:
|Company||% Change in Target||# Analysts||Current Target||% From Target||Prev. Week Target|
|Valero Energy (NYSE:VLO)||-11.36||13||$45.68||19%||$51.53|
|Newmont Mining (NYSE:NEM) ||-10.81||17||$42.14||24%||$47.24|
|Cliffs Natural Resources (NYSE:CLF)||-2.21||12||$26.53||15%||$27.13|
Data Source: Bloomberg
By comparison to the target price, below is a chart of the book value of the companies:
The resource sector is tricky for investors at nearly all levels of experience. Novice investors might view the steep drop as a buying opportunity, but value is only created for investors if the stock price is below the company’s intrinsic value.
Investors need to decide if the companies receiving a lower target price deserve an investment. There are three companies that investors should focus on.
In the oil and gas refining space, analysts lowered the target price for Valero Energy Corporation (NYSE:VLO) by 11.36% to $45.68. Valero Energy Corporation (NYSE:VLO) is on a downward trend since peaking at $44.77 in March. The company is in the midst of completing the spinoff of its retail stores. To enhance shareholder value, the company is considering spinning off its logistics and transportation business into an MLP. MLPs, or master limited partnerships, are under fire by analysts. For example, the valuation for its ETN tracker for MLP is higher than the value of their underlying assets.
Investors are still interested in companies that convert to MLPs. Devon Energy Corp (NYSE:DVN) rose from $52 to $58 after the company said it would evaluate creating an MLP.
Gold Out of Favor
The disinterest in gold miners hurt Newmont Mining Corp (NYSE:NEM), as shares are 40% below a 52-week high. Analysts lowered their target price for Newmont by nearly 11%. When the company reported quarterly results, Newmont Mining Corp (NYSE:NEM) revealed that profits fell 36%. In addition to a decline in gold production, production costs are rising uncontrollably. If gold prices do not rise, gold miners like Newmont Mining Corp (NYSE:NEM) will face even lower profits in future quarters.
Analysts tweaked their target price lower for Cliffs Natural Resources Inc (NYSE:CLF) by 2.21% to $26.53. Cliffs bottomed at $16.74, and investors are now growing confident that the company has its $3.4 billion in debt under control. Cliffs issued mandatory convertible preferred shares and common shares to increase its cash balance and to help manage its existing debt. The company maintains that it has production costs under control. Cliffs Natural Resources Inc (NYSE:CLF) forecast sales that were based on an iron ore price of $148 per ton.
To reduce operational costs in 2013, development for Bloom Lakes was delayed, while Wabush will idle its plants next month.
Novice investors seeking value in resources need to exercise caution. The bulk of the share price movement in the companies is driven by macroeconomic factors. Macroeconomics are highly unpredictable, so investors should focus on companies that can weather the worst case scenarios. Newmont Mining Corp (NYSE:NEM) and other gold miners are not shielded well if gold prices decline, though investors interested in Newmont Mining Corp (NYSE:NEM) will be cushioned by a 4.13% dividend yield.
A decline in iron ore prices will hurt Cliffs Natural Resources, but the company is continuing to reduce its operational costs. Cliffs improved its balance sheet in February 2013 at the expense of existing shareholders. Investors buying Cliffs at current levels will own a company at a discount. Cliffs is valued at a forward P/E of 11.
In the energy sector, Valero Energy Corporation (NYSE:VLO) is even less appreciated by investors, trading at a forward P/E of 7. A slowing economy would reduce energy demand, but slowing growth is being led by China. Economic activity dipped after the sequester in the U.S., but few expect growth in this country. Valero Energy Corporation (NYSE:VLO) is up 87% in the last year, so investors should expect the decline to continue in the short-term.
The article 3 Resource Stocks With At Least 15% Upside originally appeared on Fool.com and is written by Chris Lau.
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