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Foolish Laggards With Burgeoning Balance Sheets

When searching for a new puppy, I've found that the runt of the litter often has the most personality. When seeking to invest in a red-hot sector, the most battered offerings can often be primed for profit even as Wall Street continues to look the other way. Since the basic-materials sector has been a notable standout during recent weakness in the markets, I decided to sift through the sector in search of some runts in this litter.

In an effort to avoid high-risk momentum plays, I used the Motley Fool CAPS stock screener to find some serious laggards that nonetheless enjoy the approval of CAPS All-Stars and the relative safety of cash on the balance sheets. I utilized the following search criteria:

  • Sector: Basic Materials.
  • At least 100 outperform picks by CAPS All-Stars.
  • Shares trading at least 50% below their 52-week highs.
  • Cash on the balance sheet of at least $1 per share.



% Below

52-week High

Cash / Share*

CAPS Rating

(5 max)

Aluminum Corp. of China (NYSE: ACH  )





PetroChina Co. (NYSE: PTR  )





Sunoco (NYSE: SUN  )





Valero Energy (NYSE: VLO  )





China Petroleum & Chemical (NYSE: SNP  )





*Cash per American depositary receipt for ACH, PTR, and SNP.
Data from Motley Fool CAPS and Yahoo! Finance, as of July 3, 2008.

Of course, a stock screen should not be a basis for portfolio action, but rather a starting point for further research. There are any number of excellent reasons why some companies may lag their respective sectors, and unless a reversal of fortune can either be observed or reasonably forecast, I urge caution. Let's dig a little deeper.

How the mighty have fallen
I found it Foolishly poignant that nearly half of the stocks returned by this CAPS screen were oil refiners, with Frontier Oil (NYSE: FTO  ) and Holly Corp. (NYSE: HOC  ) rounding out the list. After enjoying some incredible returns during earlier phases of the run-up in oil, refiners have been down in the dumps in recent months. While opinions vary widely concerning oil's trajectory going forward, Fools can reasonably expect an increase in volatility. Refiners can provide either a solid hedge for those who remain long crude oil, or a Foolish way to play any expectation of easing oil prices.

Shares of independent refiner Sunoco have shed more than half their value since this time last year, but the show of support from CAPS players makes this Fool wonder whether the stock is due for a turnaround. CAPS All-Star TMFDeej enjoys finding just such diamonds in the rough: 

I'm always fascinated with companies that are trading at such a depressed level that one can argue their break-up value is greater than their current stock price. Unless we see a dramatic plunge in the price of oil, refiners and chemical companies probably have further to fall, but I think that I'm going to take a flier on SUN in CAPS both for the attractiveness of its assets and to act as a hedge in case oil does drop.

With a paltry profit margin of 1.44%, it's no wonder Sunoco has fallen out of favor with Wall Street. Trading at just two times book value and a 2009 price-to-earnings ratio of 9.73, though, Sunoco is looking cheap. What's more, this Fool suspects the company's coking coal mining segment may provide a much-needed boost to earnings given the recent spike in prices for the solid fuel.

Cash is king
In a recessionary environment, cash on hand becomes particularly attractive as a moat between a company and the potential for financial instability. Although debt is also a key part of the picture, cash is king.

With more than 30% of its share price consisting of cash for every American depositary receipt (ADR), Aluminum Corp. of China (a.k.a. Chalco) is looking particularly solid. After retreating 70% from their 52-week high, shares now trade at a forward P/E of just 8.34, and a price-to-book ratio of just 0.43. Meanwhile, the forecast for aluminum prices is improving considerably, and CAPS All-Star ksnively sees a reversal in the making:

The decline of aluminium prices have brought down returns, and the share price along with it. Chalco's parent company, state owned Chinalco, is on a global shopping spree for copper and other metals. Meanwhile, Chalco is buying up other aluminium concerns from its parent. I expect aluminium prices to rebound this year, and I expect Chalco to have better leverage.

Using the CAPS stock screener to identify beaten-down stocks can help to reduce risk when considering entry into a hot sector. By finding the worst performers with support from CAPS All-Stars, and checking for financial strength with cash on the books, Fools may hone in on some important reversals before they occur.

Further Foolishness:

If you are interested in refining knowledge and insight into profit, join the talented community of investors active within Motley Fool CAPS; It's free and fun!

Fool contributor Christopher Barker ignores the call of the ocean so he can be there for fellow Fools trying to navigate stormy financial waters. He can be found blogging actively within the CAPS community under the username TMFSinchiruna. He owns shares of PetroChina, Aluminum Corp. of China, and Valero Energy. The Motley Fool has a refined disclosure policy.

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10/24/2016 4:02 PM
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