With the market consistently hitting new all-time highs, the best companies in the market are starting to look overvalued when compared to historical valuations. That said, there are some companies that still look undervalued, however they are not currently in favor with the market and have become slightly contrarian in nature.
So, here are three contrarian picks to help navigate the market in these uncertain times.
An unloved miner
The weakness in the silver market has provided a great opportunity to buy into Hecla Mining Company (NYSE:HL) and the company is now trading at its lowest valuation in 35 years.
Additionally, after the CAD$750 million acquisition of Aurizon Mining, funded from cash ($200 million saved over the past few years) and a $500 million debt issue, which was oversubscribed (Helca increased the initial $400 million issue by 25%), Hecla Mining Company (NYSE:HL) has increased shareholder equity by around 70%.
Moreover, Hecla has been building a steak in Brixton Metals Corp (CVE:BBB), a Canadian precious metals exploration company with a highly experienced management. Currently trading at $0.13 per share, Brixton Metals Corp (CVE:BBB) is cheap. The market, however, is not placing true value on the company’s exploration projects, which could be some of the best in the world with initial samples indicating grades of 7000 g/t Ag. Hecla’s slow acquisition of its holding in Brixton (20%) means that the company is not overpaying for some potentially game-changing reserves.
Hecla has plenty of room to churn out cash for shareholders in the future. Moreover, with a book value per share of $6.60, including the recent Aurizon acquisition, Hecla looks to offer significant value and the stock price could have reached a bottom.
A unloved Cat
Caterpillar Inc. (NYSE:CAT) has fallen out of favor with the market after well-known short seller, Jim Chanos, revealed that he had taken a position in the stock. Still, it would appear that after recent declines, the majority of the bad news is priced into the stock.
The company trades at a lower valuation than it did in 2008 and 2009, when the global economic outlook was considerably worse than it is now. On a EV/EBIT basis, the company trades at a ratio of 9.7x compared to the ratio of 10.6 for 2008 and significantly below its five-year average of 15. In addition, the company’s book value per share has rocketed from $11 in 2008 to $26.80 as of 2012. So, the price-to-book value is at its lowest in five years, 3.3x compared to the five-year average of 4.2x.
Still, there are worries about a slowdown in machinery sales, which are well founded. But the company has built up a strong and highly lucrative financing division, with a 20% profit margin and which now accounts for 16% of net income as of the first quarter.
Moreover, Caterpillar Inc. (NYSE:CAT) has been around for more than 100 years and has survived through it all. The company has paid a dividend for the last 25 years straight and total returns are in the top 25% of the S&P 500 – with so much value and history on offer Caterpillar Inc. (NYSE:CAT) is hard to turn down.
A play on Europe
Bank of Ireland (ADR) (NYSE:IRE) is a risky and contrarian play on the recovery in Europe. In particular, the recovery in Ireland, which appears to be gaining far more traction than any other economy in the Eurozone. Indeed, home prices in Ireland have started to bottom, positing their first gains in several years last month. Manufacturing is also on the recovery ,with Investec’s purchasing managers index for manufacturing firms staying above 50 for most of 2012; signalling expansion.
Investors are slowly returning to the Irish economy and like Bank of Ireland (ADR) (NYSE:IRE)’s outlook. Indeed, this confidence shows in the company’s recent debt issue; $650 million of three-year unsecured debt at a yield of 2.7%, which was almost half of the rate the bank paid to borrow back in September 2009. Actually, this rate is less than many US banks are being asked to pay.
From a bottom-up view, the bank’s net interest margin expanded 14 bps to 1.3% during 2012 and, as of the end of 2012, the banks’ loan-to-deposit ratio was below 130%; that’s down from 175% in December 2010. The bank’s Tier one capital ratio is reaching 14%, which is higher than that of banking-giant Wells Fargo & Co (NYSE:WFC), which has a ratio of 12.1%.
Overall a risky but well-balanced play on Ireland’s recovery.
Foolish summary
All in all, these three contrarian picks are risky but to an extent they all have features that support their long-term investment thesis. Caterpillar Inc. (NYSE:CAT) has a rich heritage and is a world leader in its field. Hecla is over 100 years old and is trading at its lowest valuation in 35 years; and Bank of Ireland (ADR) (NYSE:IRE) is the biggest bank in its home market that is rapidly returning to health. Overall, all three plays offer some good rewards for a low level of risk.
Dividend stocks can make you rich. It’s as simple as that. While they don’t garner the notoriety of high-flying growth stocks, they’re also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.
The article Three Contrarian Picks originally appeared on Fool.com.
Fool contributor Rupert Hargreaves owns shares of Caterpillar. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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