The second quarter of 2010 has been a bad one.
The broad market has declined by about 9.5% over the past three months. Because small-cap stocks are generally more volatile, they've experienced a greater, 12% drop. That's almost to be expected. However, what's interesting is that large-cap stocks have actually fallen a slight bit more than the broad index. These are the billion-dollar companies that usually hold up well in a recession or a double dip.
The good news is that now the market is ripe for cherry-picking. Hundreds of large, successful companies have gotten hammered as of late, and that means there are some great value plays to be had.
In order to get you started, I ran a screen for large-cap stocks that have dropped significantly over the past three months and that are trading for price-to-earnings ratios less than 14. In addition, I used our 165,000-strong CAPS investing community to select only the best of the best, those companies with a four- or five-star ranking. Here are the top three companies:
|
Company
|
Price-to-Earnings Ratio
|
13-Week
Price Change
|
CAPS Rating
(out of 5)
|
|
Transocean (NYSE: RIG )
|
6.1
|
(37.1%)
|
****
|
|
Freeport McMoran Copper & Gold (NYSE: FCX )
|
8.3
|
(22.2%)
|
****
|
|
Teck Resources (NYSE: TCK )
|
8.0
|
(21.8%)
|
****
|
CAPS data as of 7/16/10.
Could the debacle be coming to an end?
As you're probably tired of being inundated with horror stories emanating from the BP (NYSE: BP ) debacle, I'll try to spare you all the past details. BP's Deepwater Horizon rig (yes, the one that exploded and has leaked more than 180 million gallons of oil into the Gulf) was leased from Transocean, which is one of the largest deepwater rig contractors in the world. With unknown liabilities, a potential drilling moratorium, and ongoing safety concerns, Transocean has been demolished in the market.
Originally, the company tried to shield itself using legislation that would have capped liabilities at an estimated $26.7 million. The Justice Department, however, was having none of that, calling the request "unconscionable." Transocean is now taking a softer stance, saying that "We stand ready to meet any legal obligation that arise[s] from that status;" the status referring to a possible contamination of the actual rig.
With so many uncertainties regarding the Deepwater accident, it's almost surprising that Transocean still has its four-star ranking in CAPS. But investors obviously like the upside here, as more than 97% of investors who rated the company think it will outperform the market.
Digging for gold
While the world index has dropped by about 7% over the past 90 days, the iShares S&P Global Materials Sector ETF (NYSE: MXI ) has plunged by 14.5%. Surely there are bound to be a few hidden gems amid the rubble?
You don't have to look far to see which of the big boys are falling hard. Freeport-McMoran is an industry leader that mines primarily for gold, copper, and molybdenum, with operations from North America to South America to Africa. Freeport reported a solid first quarter, as increased gold and copper prices helped offset lower volumes. It reiterated an optimistic outlook as it expects the second half of 2010 to be better than the first.
So where's all the bad news? Yamana Gold (NYSE: AUY ) , for instance, had a pretty disappointing report last quarter. It failed to meet analyst estimates, and cost increases in the fourth quarter trickled into 2010 and forced its cash costs of gold per ounce to $366 (as opposed to the $348 that was expected).
Copper producer Teck Resources reported increased revenues and earnings last quarter, but has still taken quite a beating. Recent reports from the International Copper Study Group have said copper supply is expected to outpace demand because of a slowing industrial sector. This obviously doesn't bode well for the company, as excess capacity could lead to decreased prices.
However, not all is lost. Taseko Mines (NYSE: TGB ) , another copper miner, has recently reported strong production results from its Gibraltar mine. It's been able to increase revenues and earnings quarter-over-quarter, and hopes that its continuing investment in and modernization of the Gibraltar mine will reap massive dividends in the future.
The foolish bottom line
Don't let fear get the best of you. A falling or stagnant market can be a great thing in the long term if you take advantage of the opportunities in front of you. Fortunately for investors, there's no shortage of options, and large-cap stocks just happen to be some of the best around.
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