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, Inc. (NYSE:TXI)
In spite of the steady rebound in the construction industry, certain companies look predisposed to underperform. Take Texas Industries, Inc. (NYSE:TXI) 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, Inc. (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, Inc. (NYSE:NLY) 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 Corp. (NASDAQ:AGNC). As rates rise, Annaly and American Capital Agency Corp. (NASDAQ:AGNC)’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.
The article 3 Stocks to Get on Your Watchlist originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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