Vale (NYSE:VALE), the Brazil stock that focuses on metals and mining, is not exactly a sexy pick right now. If you like materials stocks, most investors typically go for gold or maybe silver. If you like emerging market stocks, most investors are looking to Asia. If you like stocks that feed the industrial sector … well, most investors think you are crazy.
But investors should take notice of Vale right now. The stock is showing tremendous growth over the long term, pays a plump dividend (though an admittedly volatile one that fluctuates quarter to quarter) and could be your best bargain buy in a market that feels painfully overbought.
I recently talked up the prospect of buying Alcoa (NYSE:AA) for similar reasons, citing Alcoa stock as a great bargain buy. But Vale is even more attractive being 10 times the size, paying a bigger dividend and having a footprint in emerging markets.
The short term might be rocky, but here’s why I really think Vale could be a blockbuster investment for the long term:
Metal Prices Firming Up
Yes, industrial demand remains weak. That’s not exactly news to anyone since manufacturing is stagnant amid a global economic downturn and the housing market crash has put a big damper on the needs for plumbing, wiring and other materials that use base metals.
Click to EnlargeBut a look at copper and aluminum price charts hardly show that it is the worst of times. While prices haven’t regained to pre-recession levels — which is no surprise — they have come storming back during the past three years from financial crisis lows.
Consider these charts, which show copper is up almost four times over from its lows, and aluminum is about double 2009 levels. Granted, there has been a softening in the past few months — but the overall trend continues to be up for the long term.
I suppose car sales and home sales will slump even lower than the “new normal,” but frankly, if you believe that, you shouldn’t be investing in any stocks for the long term. The fact is that manufacturing has almost nowhere to go but up if the American economy is going to build a true recovery in the next year or two.
Vale Fundamentals Are Strong
First-quarter revenue in fiscal 2011 almost doubled for Vale, from just shy of $7 billion to $13.8 billion. Second-quarter revenue was up “only” 50%, from $10.3 billion to $15.7 billion.
After a brutal 2009 in which Vale earnings totaled just 99 cents per share on revenue of $24.3 billion, fiscal 2010 boasted earnings of $3.24 and revenue of $47.2 billion. Operating cash flow in 2009 totaled $7.1 billion. In 2010, that number soared to $19.7 billion.
You might think this is all a look in the rear-view mirror, and I’ll admit growth 12 months ago isn’t exactly a huge reason to buy in now. However, it does show the powerful potential of this stock even in a choppy market.
Also, let’s consider that Vale only added 20% from Jan. 1, 2010, to Dec. 31, 2010, while the S&P 500 added almost 15%. One easily could make the case that the market was overlooking Vale and has yet to price in those impressive numbers.
Looking forward, the EPS forecast for fiscal 2011 is $4.68, according to Standard & Poor’s — that’s a 44% leap over fiscal 2010’s $3.24. Revenue is on track to hit almost $62 billion — 30% above the $47.2 billion in the previous year.
Yet Vale has given up all of those 2010 gains and more — it’s down more than 25% year-to-date. That seems a harsh reaction to numbers like these even if baseline demand for aluminum and copper remains disappointing.
Charts Show a ‘Buy’
Click to EnlargeLastly, a look at the charts shows that Vale has drifted significantly below both its 50- and 200-day moving averages. Simply moving back to the $30 range where these metrics are tracking would be a 20% gain from current valuations around $25 for VALE stock.
What’s more, a so-called “golden cross” occurred this summer with the August volatility. Many technical analysts believe when a shorter-term moving average moves above the longer-term average, it is a bullish signal.
To top it all off, Vale has a forward P/E under 6 right now, which is less than half that of most S&P 500 stocks.
The icing on the cake is that Vale pays a substantial (if volatile) dividend. Based on its last quarterly payout of 37 cents a share, the company has a yield of almost 6% — though payouts admittedly have fluctuated between as little as 17 cents per quarter to as much as 57 cents in the past year. That means a dividend of 3% on the low end of the spectrum, which still is a pretty good hedge.
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