I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Yamana Gold (NYSE:AUY)
Even if you're not the biggest fan of metal stocks, if you're going to add one to your Watchlist, make it Yamana Gold.
Earlier this year, I ran a comparison of the top 12 gold miners, taking into account their mining costs, P/E ratio, production growth, and debt-to-equity, and Yamana Gold easily came out on top. The Yamana advantage relates to the fact that its South American mines are rich with copper and molybdenum in addition to gold. These byproducts help offset the company's gold mining costs and give it a product that can be in high demand across a myriad of regions -- copper in china and molybdenum for steelmaking in the U.S, for example.
Relatively speaking, there is only one of other gold miner that even comes close to Yamana's cost structure thanks to byproducts, Goldcorp (NYSE:GG). While I have nothing at all against Goldcorp (in fact, I feel it should be on your Watchlist as well), its byproduct costs have shot higher in recent quarters and stood at $565/oz. as of the first quarter. It's also having legal issues with regard to certain land rights located within its Penasquito mine site. By comparison, Yamana's first-quarter byproduct cash costs totaled just $383/oz. and its all-in sustaining costs were nearly $280/oz. lower than Goldcorp!
Yamana is perfectly positioned to take advantage of any rebound in gold -- which would seem likely with plenty of nervousness surrounding global markets -- but can also easily survive even if gold were to dip below $1,000/oz. It still remains the best gold miner, statistically speaking, and should be closely monitored for an attractive entry point.
Texas Industries (NYSE: TXI)
In spite of the steady rebound in the construction industry, certain companies look predisposed to underperform. Take Texas Industries as a perfect example. It provides heavy construction aggregates to the commercial construction industry while also acting a cement supplier to the consumer segment. Although its orders, and even to some remote extent its pricing power for cement, has improved modestly as the housing sector has rebounded, Texas Industries is still turning only marginal profits. In fact, looking toward next year you'd see a forward P/E approaching 500!
This gives me two main causes for concern. For one, what's going to happen when the Federal Reserve begins paring back its $85 billion in monthly bond purchases and interest rates rise even more than they already have in the past week? My guess would be that mortgage loan applications would fall and commercial loan activity would slow dramatically, resulting in less demand for Texas Industries construction aggregates. Even if homebuilders are smart about this process and limit the amount of market inventory in order to maintain strong pricing power, it'll still mean fewer orders for Texas Industries.
The other concern is more superficial: its valuation. Texas Industries is carrying close to $630 million in net debt on its balance sheet and has missed Wall Street's EPS expectations in two of the past four quarters -- not to mention that forward P/E of nearly 500. With a free cash outflow in seven of the past 10 years, I'd certainly suggest looking at this from a short-selling perspective.
Annaly Capital Management (NYSE:NLY)
Whereas Texas Industries shareholders should be looking at things from the demand side of the equation and wondering how slow it could get if interest rates rise, Annaly Capital Management shareholders should be wondering why investors think things are possibly this bad!
There's certainly no way of sugarcoating the fact that the recent jump in interest rates is going to further tighten the net interest margin of mortgage REITs like Annaly Capital Management and American Capital Agency (NASDAQ:AGNC). As rates rise, Annaly and American Capital's borrowing costs will rise making it more difficult to turn sizable profits.
However, there are reasons to believe that investors could be overreacting to the Fed's comments that it may soon pare back its bond purchases. To begin with, the Fed is still committed to keeping its target Fed Funds lending rate at historically low levels through 2015. With that sort of visibility, it will allow Annaly Capital and American Agency to utilize their leverage to maximize their profits.
Another factor not worth forgetting with these two companies is that they deal only with agency-backed mortgage-backed securities. Simply put, this means that Annaly and American Capital's MBS' are backed by the U.S. government in case of default. Furthermore, if the government is buying fewer MBS' on a monthly basis, it'll open up a bigger opportunity for companies like Annaly to make more profitable MBS purchases.
My suggestion would be to ignore the overwhelming pessimism and dig deeper into Annaly Capital Management.
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company: