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It’s Christmas Eve. And I hope you’re having a happy holiday. Your shopping for loved ones should be done now. So let’s turn to the other kind of shopping you might be thinking about … buying undervalued stocks.
After all, the New Year is just around the corner. And as we bid a “good riddance” to 2008, it’s time to pick potential bargains for 2009.
In fact, so many large-cap stocks have been beaten into the dirt that you don’t even have to look at small-cap stocks — there are plenty of large diamonds in the dustbin.
Three Bargains Worthy of a
“Ho-Ho-Ho!”
Bargain #1 — Grains
The gifts from the three wise men were frankincense, myrrh and gold — the first two being products you get from trees. So it’s perhaps appropriate that my first stock-ing stuffer is also agricultural.
Archer Daniels Midland (ADM) is the world’s biggest grain processor — oilseeds, corn, wheat, cocoa, and other feedstuffs. It also manufactures soybean oil, protein meal, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients.
ADM has had a good run recently — doubling from the low hit on October 13. But it’s still about 40% below the high it hit back in April. So, it has plenty of room to run to the upside.
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This company is ringing the cash register! Archer Daniels posted net sales and other operating income of $21.16 billion for its most recent fiscal quarter. That’s up a huge 65% from the year before. And the company easily surpassed the consensus revenue estimate of $15.98 billion.
Net earnings totaled $1.05 billion, up from $441 million the year before. Diluted earnings per share totaled $1.63, up from $0.68 per share last year. That was a whopping 122% over analysts’ estimates. What’s more, the company has surprised analysts on the upside in four of the last five quarters.
| P/E | Est P/E | PEG | Price to Cash Flow | |
| ADM | 7.5 | 8.3 | 0.55 | 6.7 |
| Industry | 13.9 | 13.2 | 1.47 | 10.6 |
Analysts expect ADM’s earnings to go down this quarter. But that may already be priced into the stock. And another upside surprise could send the stock soaring.
The company is expected to raise its dividend in the next quarter, from 13 cents to 14.5 cents. In fact, ADM’s dividend has grown an impressive 16.7% over the past five years.
ADM is cheap by many metrics — with a price-to-earnings of 7.5, estimated price-to-earnings of 8.3 and estimated price-to-earnings growth of 0.55. These are all discounts to the food product industry.
Grain prices are volatile right now. But ADM is one of those companies that can make money whether prices go up or down. That’s because the prices it charges can be “sticky” — they can stay higher longer than its input costs.
Meanwhile, lower corn prices should help ADM’s ethanol biofuels business …
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| Government mandates for more ethanol fuel is bound to boost ADM’s profits. |
Now that elections are over, many people are forgetting about the government’s ethanol mandate. But almost a third of the 2008 U.S. corn crop will be used to generate the required 10.5 billion gallons of ethanol next year. By 2015, the government’s mandate rises to 15 billion gallons.
Furthermore, with gasoline and ethanol prices falling, many pure-play ethanol companies are either bankrupt or on the brink. VeraSun and five smaller ethanol companies have all gone bankrupt in the past few months. That leaves conglomerate ADM free to gobble up more market share and take advantage of those corn-fed government ethanol mandates.
That’s not all … Looking ahead to the long term, the world’s population is projected to grow 33% by the year 2040. And the average person needs 1.57 pounds of grains a day for a healthy life.
And I expect Archer Daniels Midland will make the most of it.
Bargain #2 — Energy
With energy prices getting beaten to a bloody pulp, you might think that investing in anything energy-related right now is a pretty dumb idea. But the company I’m pointing you to controls natural gas pipelines and has a steady stream of profits.
Energy Transfer Partners (ETP) has pipeline operations in Arizona, Colorado, Louisiana, New Mexico, Utah and Texas. That adds up to approximately 14,300 miles of intrastate pipeline in service, with approximately 500 miles of intrastate pipeline under construction, and 2,400 miles of interstate pipeline.
ETP’s natural gas operations include natural gas gathering and transportation pipelines, natural gas treating and processing assets, and three natural gas storage facilities. ETP is also a retail marketer of propane.
| Est P/E | Dividend yield | Price to book | Price to Cash Flow | |
| ETP | 9.1 | 10.2 | 1.46 | 8.3 |
| Industry | 10.3 | 7.9 | 5.7 | 3.9 |
The company has a debt-to-equity ratio of 1.5, which is much lower than the industry average of 8. In fact, by many metrics, ETP is trading at a discount to the industry. And look at that dividend yield — 10.2%. ETP has boosted its dividend 24% over the past five years and is expected to raise it again in the next quarter.
Even with energy prices falling, ETP’s earnings in the most recent quarter beat analysts’ estimates by 106%. It helps that, as of early December, the volume of gas transported through ETP’s pipelines had jumped 35% so far this year.
This type of earnings power should protect ETP’s dividend and help it ride out the downturn in energy demand.
Natural gas is testing the low it set last year and isn’t far away from a five-year low. While there may be more downside, odds favor there not being much more to go.
ETP’s stock is down 37% from its peak and down 18% for the year. And while natural gas is approaching its lows, the stock has done well in the last month. In fact, it is approaching overhead resistance, so consider waiting for a pullback to add it.
Or if you’d rather take one step back from investing directly in the pipeline biz, Energy Transfer Equity (ETE) is a master limited partnership that owns 46% of ETP.
Bargain #3 — Gold!
Gold is always a good gift for the holidays. And one of the best gold stocks out there is Agnico-Eagle (AEM). It’s a gold producer with operations ranging from Quebec to Finland to Mexico. AEM is not a value stock by most measures. But let me show you why it has hidden value.
Agnico-Eagle has three new mines starting full production next year — Kittila, Lapa and Pinos Altos — and another mine, Meadowbank, that should start commercial production in 2010. The company is also increasing production at its current projects. End result — a surge of new gold production.
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If gold averages $900 an ounce in 2009 and $1,000 an ounce in 2010 — prices I think are certainly achievable — Agnico-Eagle’s earnings per share should look like this …
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Est. Earnings Per Share
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2008
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2009 | 2010 |
| $0.49 | $0.61 | $2.12 |
That means in the space of two years, we’re likely to see Agnico-Eagle’s share earnings quadruple, if the price of gold hits my targets. Costs are creeping up — as they are at all mines — but Agnico’s earnings growth should far outpace rising costs.
Cash flow is very important too — and during this same time frame, we should see Agnico-Eagle’s cash flow per share rise from $1.03 in 2008 to $1.32 in 2009 to $4.04 in 2010.
More good news: The company has plenty of cash, more than enough to see it through the development of its new projects. And it has no debt.
Agnico-Eagle has a small dividend yield of 0.39%. However, what’s noteworthy is that its dividend has skyrocketed a stunning 32% over the past five years!
Agnico-Eagle was one of the picks in my recent gold report, “Your Golden Parachute for 2009.” I recently recommended that subscribers take double-digit gains on half the position. And they should be holding the rest for even juicier gains.
So there you are … three bargains to boost your holiday spirits.
Plus, I’ve got my eye on a few more undervalued stocks. Some could become absolute steals in the weeks ahead! And I look forward to telling you about them in my upcoming Money and Markets columns.
Ho-ho-ho, and HAPPY HOLIDAYS!
Sean
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