Mispriced companies are rare diamonds in the stock market's rough. If you want to find them, you'll have to search through a whole pile of rocky rejects first.
That's why every member of our Motley Fool Global Gains research team has to present one new stock idea to the rest of us each month. While the ideas we like best end up becoming official Global Gains recommendations, we've passed on a number of promising companies, waiting for either a better valuation or greater certainty regarding an aspect of their business.
Below, I've listed two of the companies we're still mulling over, along with the reasons why they intrigue us. If they sound good to you, consider adding them to your own watch list as well.
Potash Corp. of Saskatchewan (NYSE: POT )
Potential investment thesis: This is the world's largest, lowest-cost producer of a commodity that has secular demand tailwinds and for which marginal supply is costly and challenging to bring online. Further, with its ample and proven reserves, Potash Corp. controls more than 20% of the world's potash capacity -- giving it a modicum of stability and price control in the space. So long as crop prices continue to rise and with them fertilizer consumption and fertilizer prices, Potash Corp. is well-positioned for long-term profits. The company also has significant investments in industry peers Israel Chemicals, Arab Potash Co., and Sociedad Quimica y Minera de Chile (NYSE: SQM ) .
Potential points of failure: As with any commodity producer, Potash Corp.'s fate is closely tied to Potash prices, which are sensitive to inventory levels on the supply side and weather and crop prices on the demand side. Although fertilizer consumption trends around the world are improving and the company expects continued strong demand, the company has been investing heavily in new capacity which could leave it vulnerable if the market sees weakness in China or a global "double dip" recession.
What we're waiting for: Although we love Potash Corp.'s niche and business dynamics, the company is quite difficult to value given the high historical variability of its input costs and selling prices. That said, recent earnings exceeded guidance, and the company raised guidance for the year. It should benefit so long as fertilizer volumes continue to normalize, and we are watching for further signs of that while revising our valuation model.
Millicom International Cellular (Nasdaq: MICC )
Potential investment thesis: Millicom is one of the world's fastest-growing and most profitable telecom companies, yet it trades for no more than an average industry multiple. The company's success marketing its services in extremely underpenetrated markets in Africa and Latin America are evidence of a materializing multiyear growth story that will reward investors with both capital gains and -- as the company has already done -- special dividends.
Potential points of failure: Like many telecom companies, Millicom must continue to invest in infrastructure to keep its network humming -- which could be a drag on capital if growth trends in Latin America and Africa don't continue. Further, while these markets are exciting, they also force Millicom to navigate political volatility and sometimes even corruption (as Senegal's alleged efforts to blackmail the company make clear). Competition from the likes of Vodafone (NYSE: VOD ) , France Telecom (NYSE: FTE ) , MTN Group, and others is also increasing, which should put pressure on pricing and profitability going forward.
What we're waiting for: Despite its seemingly reasonable seven times EV/EBITDA multiple, Millicom looks expensive at $90 per share given our estimated capital requirements for the business going forward and the pricing pressures we expect as competition and mobile phone penetration rates increase in Africa. We'd likely try to be opportunistic buyers in the $70s.
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