Sometimes stocks go up. Sometimes stocks go down. Short-term moves in either direction can occur for rational or emotional reasons. But rational lines of thought tend to win out over longer periods of time. Right now, global trade disputes -- especially the one between the United States and China -- are sending Wall Street into a tizzy. But that doesn't mean analysts' predictions will be right.
When it comes to fertilizer producer Intrepid Potash (IPI 1.30%), aluminum leader Alcoa (AA), and cardboard manufacturer International Paper (IP 0.57%), it seems that Wall Street is leading with emotional arguments. However, all three businesses have demonstrated robust results through the first half of 2018, which hints that Mr. Market may soon have to admit he was wrong and value each stock more appropriately. Here's why now looks like the time to buy these stocks.
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Growth! Profits! Cash flow! Sliding stock price?
Perhaps the best measure of a company keeping its head down and executing, aside from the actual results, is the press release section of its investor relations website. Investors who wander over to Intrepid Potash's digital digs will see that the only press releases so far for 2018 are those announcing quarterly results -- the bare minimum. Turns out, those financial results have been pretty good lately, but apparently Wall Street isn't impressed by the lack of flashy announcements.
Shares of Intrepid Potash are down 29% since the beginning of the year, which values the company on par with its book value. That makes it much cheaper than its larger peers in the fertilizer market. While imperfect, the business has significant momentum. First-half 2018 revenue, gross margin, and operating cash flow jumped 11%, 572%, and 378%, respectively, compared to the year-ago period. It was the first time in years that the company delivered positive operating income and net income for the first six months of a year.
Sure, there are blemishes, but they're relatively minor. For instance, while the company's potash production is humming along, international sales of its langbeinite nutrient (a low-chloride fertilizer for specialty crops) have been slower than expected, perhaps a result of the global trade spats. But Intrepid Potash has reduced langbeinite production to help manage inventory and navigate stagnant selling prices, which will help the segment recover quickly when markets strengthen and shipments pick up.
At this point, a healthy langbeinite market is no longer a pressing concern for shareholders. Potash selling prices were 8% higher in the second quarter of 2018 compared to the year-ago period -- a huge improvement from years of declines. Meanwhile, Intrepid Potash has begun selling its excess water inventory to oil and gas producers in the Permian Basin. Those activities generated $13.4 million in cash (how the company chooses to report sales) and are expected to generate $25 million to $35 million in cash for the full year. Simply put, this fertilizer stock appears to be on its way to earning a higher valuation.
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Betting on Canadian tariffs being removed
The trade battle between the United States and China has grabbed most of the headlines, but the U.S. has also placed tariffs on traditional economic allies. That includes Canada, which is not only America's largest trading partner, but also its leading supplier of aluminum. That makes the 10% tariff on imported aluminum really hurt, especially for Alcoa, which says it's spending an extra $14 million per month to cope with the new trade realities. Shares are down 21% since the beginning of 2018.
Here's the thing: Unlike tariffs on most Chinese imports, the tariff on Canadian aluminum imports is damaging to Alcoa because it makes 28% of its aluminum in Canada. In fact, almost everyone is surprised they haven't been lifted by now. Chances are good that exemptions eventually will be granted to American aluminum manufacturers such as Alcoa, which asked for a waiver in early August.
Although nothing is guaranteed, investors can find some solace in the fact that Alcoa's business is the strongest it has been in years. Second-quarter 2018 revenue jumped 25% from the year-ago period, and earnings were significantly higher than the average Wall Street estimate. While the company lowered its full-year 2018 adjusted EBITDA guidance to a range of $3 billion to $3.2 billion, down from the previous range of $3.5 billion to $3.7 billion, it still marks a healthy leap from the previous-year totals. It's also much higher than the original range given for 2018, which had a midpoint of just $2.7 billion.
Simply put, because the American aluminum industry is closely intertwined with Canada, there's a good chance that the most painful situation for Alcoa at the moment will subside in due time. Given the strength of the business, that shouldn't be overlooked by opportunistic investors.
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Pricing in tariff pain that has yet to materialize
Investors are waiting, waiting, waiting for Wall Street's doom and gloom predictions for the North American paper and packaging industry to come true. But the fact is, the trade dispute between the United States and China hasn't been reflected in financial statements to date. In fact, the industry is enjoying record volume and pricing at the moment.
Despite overall business momentum, shares of International Paper have slipped 11% since the beginning of 2018. Through the first six months of the year, revenue and operating income climbed 9% and 336%, respectively, compared to the year-ago period. Record demand for corrugated packaging (read: cardboard) from online shopping and increased exports to China have driven the surge. But a sliding share price means the dividend yield has swelled to 3.7%, while the stock trades at just nine times forward earnings and a PEG ratio of 0.65 -- remarkably cheap for the $21 billion industry leader.
While China slapped tariffs on imports of corrugated packaging from the United States in early August, they're likely to be very brief. There simply aren't many countries outside North America that can step in to fill the gap permanently, meaning the tariffs will likely end up hurting Chinese companies more than American paper manufacturers. Besides, International Paper owns a stable of facilities sprinkled across Europe, South America, Morocco, and Turkey that might be able to step up to the short-term opportunity and blunt the impact.
The numbers just don't add up to support Wall Street's thesis for International Paper. And even if negative impacts do sprout up in second-half 2018 financials, they're likely to be temporary -- and perhaps mild. That makes the stock a buy for investors with broad time horizons.
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These stocks present an opportunity for long-term investors
When the U.S. went about slinging tariffs and trade restrictions on countries across the globe, it upset economic ties that have been in place since the end of World War II. That disrupted some of the stability Wall Street has come to rely upon, but analysts appear to be getting a little too carried away when it comes to predicting the magnitude of the fallout. The overreaction has created some awesome opportunities for individual investors with a long-term mindset. That's what makes Intrepid Potash, Alcoa, and International Paper a trio of stocks worth buying.
