Allow me to sum up my case with a table (Figure 2) containing some key fundamentals.
Figure 2:
| Valuation | Vale |
| P/E | 8.92 |
| Forward P/E | 8.74 |
| Price/Book | 1.32 |
| Price/Sales | 2.83 |
| Yield | 3.00% |
| Avg. Five Year Profit Margin | 35.70% |
Along with attractive value there has been a shift in the macro-economic outlook. The multi-year downtrend was created by the slowdown in China and amplified by speculation of a hard landing. Now that China has made a soft landing and might even be gearing up for some rapid growth the fundamental view of Vale’s future may have changed.
Once again, let’s review the order of operations:
Value first: Without value you are buying a bubble. Air isn’t worth much and neither is the bubble holding all that air inside.
Facts Change: A fundamental macro-economic shift put this stock on my watch list.
Conclusion: We have value, and a macro-economic shift all pointing to a bullish run for Vale. However, due to the major price fluctuations seen recently this stock is not for the squeamish. Speculative Buy and Hold.
BONUS DISCUSSION: Joy Global Inc. (NYSE:JOY)
Recently Joy Global Inc. (NYSE:JOY) has caught my attention. First with its attractive valuations (Figure 3) following the recent stock price drop. This was brought about by negative sentiment surrounding China and the potential decreasing demand for raw materials extraction equipment. Then, as mentioned before, it looks as if China is making a bit of a soft landing and setting up for quite a comeback.
Figure 3:
| Valuation | Joy Global | Industry |
| P/E | 8.6 | 12.4 |
| Price/Book | 2.53 | 2.75 |
| Yield | 1.1% | 0.90% |
| Avg. 5 Year Dividend Growth Rate | 3.22% | -4.03% |
| Avg. 5 Year Sales Growth Rate | 14.47% | -14.55% |
| Long Term Debt/Equity | 0.51 | 1.47 |
| Avg. 5 year Net Profit Margin | 12.90% | 5.30% |
On top of these attractive numbers Joy is also beating the industry average in RoI, RoA, and is a leader in capital re-investment.
Here we can again see the above thesis in action. Value first and then the observation that the macro economic outlook of China is changing.
Conclusion: Joy Global has been placed on my personal watch list. Valuations look attractive but I would like to see the demand for raw materials significantly rise for two consecutive quarters to confirm that new extraction equipment will be needed in greater supply. That would produce a more favorable earnings environment. Currently the P/E is 8.6 and the Forward P/E is 9.73. As a general rule I hardly ever buy companies with a greater Forward P/E. But as analysts raise earnings estimates for the future look for that Forward P/E to shrink.
Overall Conclusion: I always get a good feeling about a stock when value and macro-economics all line up pointing to good things in the future. But I also make sure to watch for the other side of that equation. High P/E’s, unsustainable stock price returns, and poor (or overly optimistic) macro-economic outlooks, can also help you call a top in your favorite stocks. Even a long term value investor needs to actively manage their portfolio to take advantage of both buying and selling opportunities for maximum returns over the long run. Never be afraid to take profits or at the very least play with the house’s money.
The article Dow at Five Year Highs: What to Buy and Sell originally appeared on Fool.com and is written by James Catlin.
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