If you're a value investor, you can pat yourself on the back, because most people aren't cut out to handle your style. It seems easy enough, right? All you have to do is find a stock out of favor, and then buy low and sell high. Of course, if it was that easy I wouldn't need to write this, nor would you be reading. The truth is that value investing is difficult and can often take years for the gains to pan out -- something investors have a hard time waiting for. If you can be patient enough, I think both Devon Energy (NYSE:DVN) and AK Steel Holding (NYSE:AKS) will reward investors. Here are some reasons to be bullish.
Devon has an asset base that includes both oil and natural gas plays in the U.S. and Canada. Its recent change in strategy was to shift its focus to U.S. and Canadian assets and sell off its deepwater and international plays. Starting late in 2009, the company sold nearly $10 billion in assets, which has led to a very strong balance sheet.
I believe this was a great decision, but the market hasn't realized it yet, leaving Devon's stock price undervalued. What's more is that Devon's portfolio includes a balanced mix of short- and long-term asset plays, providing sustainable growth.
Short-term growth will be driven by a handful of its oil assets, including its sizable position in the Permian Basin that drove a 23% year-over-year increase in Devon's U.S. oil production. Morningstar projects Devon's average daily production to more than double in the Permian over the next four years, which will contribute nicely to the company's growth.
Devon's first quarter didn't set the headlines on fire, but its liquid plays produced impressive results and continue to improve. In the first quarter, Devon added 20 new wells to its Bone Spring oil production, and construction is 60% complete on its third Jackfish oil sands project. While Devon focuses on oil-rich plays, its solid balance sheet will provide the needed cushion while natural gas prices remain low.
Right now the stock looks fairly cheap and trades at a price-to-book ratio of 1.2 compared with the industry average 1.8. If natural gas prices improve, it will provide a positive catalyst to boost Devon's stock price -- rewarding investors.
AK Steel is the second company I think is undervalued. It operates seven steelmaking facilities in the United States, and its products are mainly used in the automotive, construction, and machinery sectors. The largest market for steel products in the U.S. is the automotive industry, which represented 36% of AK Steel sales in 2011 -- the most recent available data by market.
During the recession, U.S. vehicle sales completely tanked and AKS felt the pinch, but the automotive industry has since rebounded. Currently, vehicle sales in the U.S. are on pace to break 15 million in units and aren't looking to slow down. Low-interest financing and pent-up demand will continue to drive sales upward in the years ahead. The rise in automotive sales should increase demand for AKS products and improve its earnings.
On a different note, AKS has improved its cost position, which had previously caused profitability issues. It's taken sizable chunks out of its health-care and retirement costs, which will make AKS more competitive with its steel producing rivals.
The steel industry is cyclical and will see improvements as the global economy improves. When demand is strong and steel prices improve, AKS earnings can climb dramatically over a few quarters -- boosting the stock price quickly.
Both of these stocks have large risks and partially depend on having the global economic recovery create demand and improve commodity prices. Both appear to be undervalued but have certainly arrived at lower stock prices for a reason. If you're bullish on a continued global recovery, these could be two stocks to buy now. It may take years to pay off, but both could reward patient investors.