This 5-Star Stock's Wearing Concrete Shoes

I have praised the uncanny stock-picking prowess of my fellow members of Motley Fool CAPS on more occasions than I can count.

Within that context, I hope that I may be indulged to highlight one instance where I believe some of my fellow Fools may be exhibiting a touch of excessive optimism.

Despite its storied weakness through the early phases of our ongoing economic downturn, global cement and aggregates supplier Cemex (NYSE: CX  ) has earned a coveted five-star rating in CAPS. For the more than 4,200 CAPS members who see Cemex outperforming the S&P 500 going forward, I offer one Fool's contrarian analysis.

The company's second-quarter loss from continuing operations of $301 million did not quite live up to the prevailing expectation by analysts for earnings of $84 million. It's not the first time I've seen analysts misjudge a quarterly result by hundreds of millions of dollars, but it is worth noting that this $385 million earnings discrepancy occurred despite those same analysts predicting the top-line result to within 1%.

Aside from the persistent weakness in demand for its products throughout key markets in North America and Europe, the major culprits in Cemex's dastardly loss were the result of financing costs that quadrupled from prior-year levels to reach a $438 million drain on earnings. Included within those costs was a $43 million loss on derivatives, but remaining exposures appear to be high and fair market values disturbingly low.

Meanwhile, an 8% improvement in cement volumes in the United States was negated by an 8% drop in net sales revenue from U.S. operations. While some may point to the volume spike as a "glimmer of hope," I for one would seek far more than a glimmer before considering an investment in this heavily impaired stock. With total debt of $16.6 billion even after aggressive debt repayment, the stakes are simply too high for this cautious Fool.

With a familiar chant, Cemex reminded investors of prior cost-cutting measures and how well-poised the company is to benefit from a recovery. At this stage, however, it would take more than mere margin expansion like that revealed by wallboard manufacturer USG (NYSE: USG  ) last week to render these stocks attractive. According to USG, "demand remains exceptionally weak." For its significant exposure to the U.S. housing market, I consider Weyerhaeuser (NYSE: WY  ) another name to avoid despite the looming conversion to a REIT. Just as first-quarter commentary from domestic steelmakers Nucor (NYSE: NUE  ) and Commercial Metals (NYSE: CMC  ) made clear the last time I looked into Cemex, any semblance of recovery we may have witnessed to date has not only been jobless ... but also homeless.

Those investors who are keen on exposure to materials are encouraged instead to focus upon those suppliers with major ability to allocate product to Asia, still the lone bright spot on the globe for materials demand. From prolific copper exporter Southern Copper (NYSE: SCCO  ) , to well-positioned Korean steelmaker POSCO (NYSE: PKX  ) , materials sector exposure does not have to include undue exposure to the impaired demand environments of Europe and North America.

In a recent Motley Poll, readers were nearly evenly split in their expectations regarding the voyage that awaits the American economy overall: 49% of respondents called for a double-dip recession (or worse), while 50% expected a slow recovery (or better). Your opinion is needed to break the tie, so please take a moment to vote in that poll, and to express your own outlook for the American economy in the comments box below.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Nucor. Nucor and Cemex are Motley Fool Stock Advisor recommendations. USG is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a stainless disclosure policy.


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