There is no shortage of factors for investors to consider in the opening days of the third quarter of 2018. Global trade tensions are heating up. Energy prices and interest rates are rising. And the S&P 500 has only been more expensive than it is today at one other time in history -- the run-up to the dot-com bubble. But that doesn't mean every stock that's down on its luck should be skipped over for consideration in your portfolio.
In fact, despite a historically expensive stock market, quite a few stocks are on sale this quarter. I would count infrastructure asset manager Brookfield Infrastructure Partners (NYSE:BIP), proppant and ceramic supplier U.S. Silica Holdings (NYSE:SLCA), and the Goodyear Tire & Rubber Company (NASDAQ:GT) on that list. But are they all buys?
Overreacting to uncertainty in Brazil
After delivering some of the best returns on the market in recent years -- total returns of 418% in the last decade, compared to just 166% for the S&P 500 -- units of Brookfield Infrastructure Partners LP have been cut down 8% year to date.
The main drag seems to be growing political and economic uncertainty in Brazil, where the company owns 2,000 kilometers of natural gas pipelines, an electric utility, hundreds of miles of toll roads, and significant railroad operations. The business will make over $500 million in capital investments in the country in the next two to three years.
Uncertainty is a business's worst nightmare, but Mr. Market seems to be getting a little too carried away applying that narrative to Brookfield Infrastructure Partners. The $15 billion asset manager has operations across South America, North America, Europe, and Asia. As the portfolio in Brazil rightly indicates, the company boasts a diverse set of operations spanning transport (43% of assets), utilities (31%), energy (19%), and communications (7%). A slowdown in Brazil might only send a ripple, not a tidal wave, through the growth strategy.
That's further evidenced by management's recent moves, which clearly demonstrate the focus is on the long term. Brookfield Infrastructure Partners recently inked a deal with AT&T to manage 31 data centers across the world and expand the portfolio over time. It's the first concrete step the company has taken to deliver on its vertical data strategy, which was mentioned during a recent investor presentation. It's also a strong signal this high-yield stock is a buy.
Investors are impatient with delays in the Permian Basin
U.S. Silica stock jumped more than 30% from early April to mid-May, but shares have given back nearly all of those gains in the weeks since to settle down 20% since the beginning of the year. Wall Street has grown impatient over delays in starting up a new frack-sand production facility in West Texas, home to the Permian Basin, which is arguably the most important oil play in the world right now. That has shares trading at just 12 times trailing earnings and 8.6 times future earnings. It might prove difficult to pass up.
The proppant industry has roared back to life in the last two years as frack sand suppliers have rediscovered discipline. U.S. Silica enjoyed a 122% jump in revenue and 53% improvement in volume in 2017 compared to 2016, thanks to a tight market and rising selling prices. Those market conditions aren't likely to dissipate anytime soon with booming U.S. production, rising global oil prices, and delays for several new production projects.
That should help to carry the business in the near term while powdering over flaws from management's fumble in West Texas and a relatively expensive acquisition aimed at diversifying away from energy customers. CEO Bryan Shinn expects it to lead to significant cash flow generation, too, which will help to pay down debt, improve a promising logistics subsidiary, and create value for shareholders via share buybacks and dividends. That makes this frack sand stock worth a closer look.
Tariffs could ensnare this tire leader ... or not
Shares of Goodyear Tire & Rubber are down 28% since the beginning of the year. The main culprit: rising global trade tensions. Wall Street fears that Uncle Sam will slap tariffs on tire imports from China, which could set off a range of retaliatory tariffs from that nation. Meanwhile, rubber and tire products are ripe for retaliatory tariffs from the European Union, which is none too happy with America's tariffs on aluminum and steel.
Figuring out exactly how things will play out is nearly impossible, especially considering that Goodyear has 25 manufacturing facilities in its North and South America region, 15 in the Europe and Africa region, and another eight in Asia. Worse, each region manufactures products and sells into the other two.
That will likely result in a binary outcome: Tariffs could either be devastating to the business or mitigated in part by redrawing the company's global supply chain. With first-quarter 2018 operating income down 28% compared to the year-ago period on higher material costs and lower demand, it's not a great time for the business to run into new sources of uncertainty.
Given the complexity, investors are likely better off staying away from this stock. But if the risk of tariffs ends up being overblown, then investors may want to check in to see if Goodyear shares are still on sale in the second half of the year.
Not every sale is a buying opportunity
There are many reasons for Mr. Market to punish a stock, but not all arguments hold up for long-term investors. The stock drop of well-run business Brookfield Infrastructure Partners is one of the best examples of short-term thinking gone mad, creating a buying opportunity for investors. Meanwhile, the delay at U.S. Silica is a legitimate concern, but the business should be able to leverage healthy market conditions to cover up some of its blemishes and reward investors with gains anyway. And although Goodyear Tire & Rubber might be able to prove that recent angst over trade tensions is an overreaction, investors may want to acknowledge the complex situation hanging over the business and hold off on buying the stock until more certainty emerges.