My mission, should I choose to accept it, is to find the three most undervalued materials stocks to buy in September.
Dr. Ed Yardeni and his capable crew at Yardeni Research produce interesting charts weekly about the S&P 500. I’m always looking at sector performance, both monthly and year-to-date (YTD).
In the latest edition, materials stocks from the index were up 5.9% YTD through Sept. 14. That puts it well below the 17.8% return for the entire index.
Surprisingly, despite delivering one-third of the index’s performance in 2023, materials stocks are doing better than five of the 10 other sectors. If not for the 30+% return of three sectors: communication services, consumer discretionary, and technology, materials stocks would be near the top. In August, materials had the third-worst showing, down 3.5%. Only utilities (-6.7%) and consumer staples (-3.8%) were worse.
Yardeni breaks down the materials sector performance YTD into eight different sub-sectors. The three worst performers from this cohort were gold (-16.3%), fertilizers & agricultural chemicals (-14%), and diversified chemicals (-5.3%).
Therefore, it makes sense to select my undervalued materials stocks from each of these sub-sectors. Here’s hoping they can rebound before the end of the year.
Newmont (NYSE:NEM) is the world’s leading gold producer.
In May, the company announced it would acquire Australian gold producer Newcrest Mining (OTCMKTS:NCMGY) for 28.8 billion Australian dollars. Upon the transaction closing, the combined entity will produce 8 million ounces of gold annually.
Newmont and Newcrest are working their way through all the countries that have to give a regulatory thumbs up to the merger. Australia’s Competition & Consumer Commission is the most recent regulatory body to approve the deal. It did so on Aug. 21.
In the meantime, Newmont shareholders will vote on Oct. 11, followed two days later by Newcrest shareholders. If both groups approve and there are no regulatory snafus, the all-stock deal will see Newmont shareholders own 69% of the combined entity, with Newcrest’s shareholders owning 31%.
From Newmont’s April 2022 high of $86.37, the company’s shares are down 54%. It currently trades at 2.8x sales, its lowest multiple since 2018.
In the company’s Q2 2023 press release, Chief Executive Officer (CEO) Tom Palmer called Newmont’s balance sheet “the industry’s strongest.” As of June 30, its net debt was $2.91 billion, or just 9% of its market cap. Considering how much these mines cost to open and operate, it’s reasonable.
Doing an all-stock deal could turn out to be Newmont’s wisest decision, even if it does cost its shareholders massive dilution.
Newcrest’s 2022 revenue was $4.21 billion, down 8% from 2021. Newmont’s were $11.92 billion. The company’s pro forma revenue for 2022 would have been $16.13 billion. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) would have been $6.6 billion for a 40.9% margin.
NEM isn’t too far off its 52-week low of $37.45. Buying below $40 makes a ton of sense, given the combined entity’s financial strength.
FMC (NYSE:FMC) is a Philadelphia-based provider of crop protection solutions such as insecticides, herbicides and fungicides. These three product lines account for 58%, 28%, and 7%, respectively. Other products account for the remaining 7%. Farmers depend on it.
The biggest problem with the company’s business model is its reliance on its customers (farmers, etc.) and local weather. In the second quarter, for example, revenue was down 30% (28% excluding currency) over last year, partly because of a drought in Brazil and Argentina. The results could have been much worse if not for its product innovation.
“Demand for the company’s innovative products remained resilient as sales from new products launched in the last five years were essentially flat to the prior-year period despite the overall sales drop,” FMC’s Q2 2023 press release stated.
The good news is that its revenue in the second half is only expected to fall by 2% year-over-year. As a result, its full-year outlook calls for a 9% decline YoY. Its adjusted EBITDA in 2023 is projected to be $1.35 billion at the midpoint of its guidance, down 4% from 2022. However, it expects adjusted EBITDA to grow by 16% in the second half.
Unfortunately, there is a worldwide move to reduce inventories. FMC must wait it out.
Down nearly 40% YTD, FMC stock is trading at its lowest point since the March 2020 correction. The last significant drop before that was in 2014 and 2015.
If held for 3 to 5 years, the mid to low-$70s is a good entry point for FMC stock. The demand for FMC’s products isn’t going away anytime soon.
Unlike the other two stocks in this article, Celanese (NYSE:CE) is having an excellent year, up more than 25% YTD. Yet, I still believe it’s undervalued, despite reporting earnings in early August that missed on the top and bottom lines.
In Q2 2023, its revenue was $2.80 billion, 12.4% higher than Q2 2022, but over $40 million shy of the Zacks Consensus Estimate. On the bottom line, Celanese earned $2.17 a share, 57% lower than a year ago and 29 cents lower than analyst expectations. Its shares dropped by several percentage points on the miss. However, it has since regained all August losses.
Celanese has two reportable segments: Engineered Materials (56% of sales) and Acetyl Chain (44%). The former segment’s products include nylon compounds, Polyethylene terephthalate (PET), and thermoplastics. The latter business is best known for producing acetic acid used to make vinegar. Industrially, it’s essential for producing plastics, photographic film and paint.
The company’s revenue has started to slow — it was down 2% from Q1 2023 — forcing it to initiate cost cuts across its entire operation, including a reduction in inventory and production levels.
In June, the company formed a joint venture with Mitsui & Co. (OTCMKTS:MITSF) to operate a food ingredients business named Nutrinova. Celanese is contributing its food ingredients assets, technology and employees to the joint venture.
Mitsui is paying $473 million for 70% of the business. Celanese retains 30%. Most importantly, Celanese will use the proceeds to pay down debt.
Why buy CE stock? Its free cash flow was $611 million in the second quarter, 18% higher than any quarter in the company’s history. You usually can’t go wrong with healthy free cash flow.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.