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JakilaTheHun (99.94)

Seven Stock Ideas for the Impending Apocalypse: Part One

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October 15, 2008 – Comments (1) | RELATED TICKERS: SWC , PAL , MOS

THE SKY IS FALLING!  THE SKY IS FALLING!  ALL LIFE ON EARTH WILL SOON PERISH!

That means it’s the perfect time to load up on some stocks with high-growth potential!  If the world is ending, you might as well take some risks, right?  And while, we had a little bit of a reprieve due to the early week rally, don't be surprised if we see cries of DOOM DOOM DOOM a few more times before it's all over.

I’ve picked out seven stocks trading at what I believe to be a steep discount right now.  All seven are essentially commodity stocks and many are highly cyclical in nature.  Most of them are even trading below the book value of their equity right now and if the apocalypse ends up being slightly delayed, you might be able to wait them out to the next boom and make sizable returns.  

1.  Mosaic (MOS)

Potash stocks have taken a beating recently as concerns over the global economy have gripped the market.  Yet, for the next few years, I think the outlook is still very good for potash and the market seems to be overreacting.  Analyst forecasts for FY ’09 range from $11.63 - $15.00 and for FY ’10 range from $13.25 - $16.54.   That essentially gives this stock a forward P/E of about 2.  However, analyst projections might be a bit overly optimistic. 

However, we do know that MOS reported $4.67 in earnings (on a DEPS basis) for FY ’08 which gives them a trailing P/E of 7.8.  Cash flows per share were $5.71 and free cash flow per share was $4.88.  Even if they simply continued that performance for a few years, this might be a steal. 

The balance sheet looks fairly good: working capital of 2.34, quick ratio of 1.43, and debt-to-value of 41%.  Plus, as already mentioned, they are raking in considerable cash flows.  Book value is $17.2 per share.  In their most recent quarter, they had earnings of $2.65 per share and cash flows of $1.26 per share and most of the cash flow lag was due to new accounts receivable. 

I believe the prospects for potash are still fairly bright extending till 2010 at the very least (when more competition will probably come into the market and create tighter margins) and at the current rate of free cash flow production, MOS’s current price should be roughly equal to the book value of their equity in two to three years, which seems like a good bargain. 

This stock traded over $160 as recently as June ’08.  While I wouldn’t suggest that I expect this stock to get up that high again, I wouldn’t be surprised if it hit the $60-70 range at the very least sometime in the next few years, which certainly isn’t a bad return if you can get an entry point below $40!

2. Stillwater Mining Company (SWC)

3. North American Palladium (PAL)

Both of these companies are selling at a steep discount.  Right now, the main problem for palladium and platinum prices is large-scale demand destruction stemming from the current market environment in the automobile sector. There's also news filtering out suggesting that Nissan, Mazda, and some other automakers have been working on developing nanotechnologies that could reduce the use PG metals in catalytic converters. This is all bad news for palladium and platinum producers, but perhaps the market has overreacted. Even in the worst-case scenario, prices have to rise at this point because no one is going to be willing to mine for PG metals if they can't turn a profit.

While palladium's future is rather uncertain at the moment, it does have a lot of unique properties that might lead one to believe that its use will eventually be extended to newer products.  It’s already used in catalytic converters, dentistry, watch making, surgical instruments, and a handful of other applications.  If we ever start using vehicles with fuel cells, it would seem to have some very high growth potential.  So while it would be difficult for me to pinpoint what precisely could happen in the next decade, suffice it to say, there are legitimate reasons to believe its usage could eventually grow.    

There are also other trends in the industry that could cause prices to rise significantly in the future.  First and foremost, there is the issue of the depletion of the Russian palladium reserves.  Its unclear how much Pd Russia has left, but don’t be too surprised if their supply is emptied out in the next five years.  Top that off with the fact that Norilsk (home of palladium and nickel mining company Norilsk Nickel) is an environmental disaster.   Then there’s also the South African infrastructure nightmare that is slowing production of PG metals in that nation.  Given all this and the fact that in times past, palladium and platinum mining have been highly cyclical industries, this means there might be consider value to be had in players like Stillwater Mining (SWC) and North American Palladium (PAL). 

Taking a look at Stillwater first, the book value of their equity is $5.45 per share. Yet, the stock is trading around $3 to $4! SWC has a working capital ratio of 4.89, which is good. Debt-to-value ratio is 37% --- slightly higher than I like to see, but still fairly solid. All in all, I don't believe they should have any problem paying their bills in the next couple of years.

Onto North American Palladium --- the book value of their equity is $3.49, yet the stock is trading around the $1 – 1.70 range, a very considerable discount!  Debt-to-value ratio is very low at 15.2%.  Working capital ratio is 5.57 and cash over current liabilities yields a ratio of 1.91.  Hence, they appear to be in very sound financial shape and can simply ride it out until things improve. 

Given the steep discounts to book value for both of these stocks, you can basically buy in and wait-it-out for another decade.  If demand stays static for another decade (which seems somewhat unlikely to me), one might not lose that much given the value of the equity in their assets.  On the other hand, if the price of palladium and/or platinum skyrockets any time within the next decade, causing the price of SWC and PAL to spike up considerably, you just made an enormous return on your investment.

See Part Two here

1 Comments – Post Your Own

#1) On October 15, 2008 at 3:17 PM, devoish (99.07) wrote:

http://www.guardian.co.uk/environment/2008/jul/02/climatechange.endangeredspecies

Just sayin...

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