The broad-based S&P 500 is on fire, with the index gaining nearly 13% over the trailing 12-month period -- but that doesn't mean every stock has participated in the rally. Some very good companies have hit speed bumps recently that have left them looking up at an outperforming index.
However, these short-term dips could represent an excellent buying opportunity for patient investors who have a long-term perspective on their investments. With this in mind, we asked three of our Foolish contributors to name a stock they believe has the potential to reverse its recent weakness and rise significantly over the long-term. Rising to the top of the list were Silver Wheaton (NYSE: SLW), Kroger (NYSE:KR), and PotashCorp (NYSE: POT).
A quick polish is all it would take to bring back this stocks' luster
Sean Williams (Silver Wheaton): Precious-metal royalty and streaming company Silver Wheaton took a pounding following the election of Donald Trump as investors began placing their wagers on a higher growth environment with the legislative branches of government dominated by a single party. This optimism pushed the prices of physical gold and silver substantially lower over the course of the next month.
The company also faced a negative reaction from the announcement that workers at Primero Mining's San Dimas mine, a key silver-producing asset for Silver Wheaton, had gone on strike. All told, shares of Silver Wheaton have dipped by more than 30% in just eight months. This dip, though, appears to be a great buying opportunity for long-term investors.
As a shareholder, one of first factors you really come to appreciate with a company like Silver Wheaton is its business model. Because it focuses on royalty and streaming, Silver Wheaton has pretty minimal overhead expenses, and its margins are better than any traditional miner. According to the company's full-year report from 2016, its average cash cost was just $4.42 per silver ounce and $391 per gold ounce. This provides a better than $13 margin per ounce for silver and a more than $850 per ounce margin for gold. In other words, it would take a serious decline in precious-metal prices to crimp Silver Wheaton's profits.
Second, Silver Wheaton has a pretty well-diversified production portfolio. Though San Dimas does account for a notable percentage of silver production, no single mine is going to topple Silver Wheaton from being profitable. This ample diversification, and its extremely long-term contracts, ensure some degree of predictable cash flow.
Silver Wheaton may also benefit from precious-metal market dynamics. Precious metals appear poised to benefit from the uncertainty of a Trump presidency, the exit of Britain from the European Union, and the reemergence of inflation in the United States. No company benefits more directly from the perspective of margin when precious metals increase in price than Silver Wheaton.
A little spot shine is all it should take to make Silver Wheaton look lustrous over the long-term once more.
Cleanup on aisle three
Demitri Kalogeropoulos (Kroger): Kroger is one of the worst performing stocks on the S&P 500 so far this year, but that drop could spell opportunity for patient investors. Yes, the grocery chain has fallen on tough times lately. Sales growth was a meager 1% in 2016, compared with the prior year's 5% spike.
Like industry peers, Kroger's business has been hurt by aggressive deflation in key grocery departments such as meat, dairy, and eggs. In fact, a 1.3% decline in prices last quarter played the biggest role in the company's posting negative quarterly same-store sales for the first time in over a decade.
Yet the retailer improved the volume, or tonnage of sales, and also closed out its 12th straight year of market share gains in 2016. In-store brands made up a record share of the business, too, thanks in part to continued booming results from its organic franchise, Simple Truth.
These wins suggest that it won't be long before the grocer returns to its long-term growth target of improving earnings by between 8% and 11% each year -- in addition to a growing dividend. Deflation is likely to weigh down results at least through the rest of 2017. But, as CEO Rodney McMullen explained to investors recently, "We know from past experience the environment won't be deflationary forever." Similarly long-term minded investors might want to snatch up shares of this successful grocer at a relative bargain of 14 times the past year's earnings.
Because people need to eat
Rich Smith (PotashCorp): I don't know how short your definition of a "short-term dip" may be, but regardless of the length, the "dip" PotashCorp stock has endured probably fits the bill. Down 16% since its highs of late January, and down 64% since its highest price hit in the past five years -- any way you look at it, this fertilizer miner is sitting deep in a hole.
But perhaps not for long.
Oh, I'll admit that PotashCorp stock doesn't look terribly attractive today. Priced at 44 times trailing earnings, or even at an above-market valuation of 24 times what it's expected to earn next year, this stock certainly doesn't look cheap. But looks can be deceiving.
PotashCorp, you see, is a cyclical stock, waxing when farm incomes are flush, and waning when crop prices dive or when the fertilizer market is in oversupply. With PotashCorp plumbing multiyear lows, that seems to be the position PotashCorp is in right now, and as a result, Potash profits have almost never been lower.
Last year, PotashCorp earned a mere $323 million in net profit -- a full 75% less than it earned in 2015. But here's the thing: Cyclical markets also go up. How far up? Take a look at the company's historical performance .
You need look back no farther than six years to find PotashCorp earning profits of as much as $3 billion a year (nearly 10 times last year's haul). Go back three years more, and you'll see PotashCorp demonstrating an ability to earn as much as $3.5 billion when the agricultural market is most propitious. So while PotashCorp may look expensive today, there are going to be years ahead when the stars will align for farmers, and for their suppliers, and PotashCorp will earn profits sufficient to make today's market capitalization a mere four-times multiple of annual profits.
When will this happen? Only the good Lord, and perhaps the Farmer's Almanac, know for sure. But you can bet your bottom dollar that food prices, and fertilizer prices will get expensive again at some time in the future -- because people need to eat. And that's the time you'll wish you had bought PotashCorp during this short-term dip.
10 stocks we like better than Silver Wheaton
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