In today’s article I’m going to take a look at three depressed stocks that I believe could beat the market over the next few years.
Antofagasta
Shares in Chile-based copper miner Antofagasta (LSE: ANTO) have fallen by 43% so far this year. The slump in the price of copper is to blame: copper has fallen from a high of more than $4.50/lb in 2011 to just $2.10/lb today.
However, the low-cost quality of Antofagasta’s assets means that the firm’s mines are still able to operate with positive cash flow. Antofagasta reported net cash costs of $1.53/lb for the first half of 2015 and is expected to report a post-tax profit of $288m this year.
Another point in Antofagasta’s favour is that it recently acquired a 50% stake in Barrick Gold’s Zaldivar copper mine, also in Chile. This produced 100,000 tonnes of copper at a net cash cost of $1.79/lb in 2014, suggesting that it will strengthen Antofagasta’s low-cost scale.
In my view, the big opportunity is to own Antofagasta stock when the price of copper starts to recover. The firm’s low costs mean that profits will rise very rapidly, as could the share price.
I’m not sure Antofagasta is quite cheap enough to buy yet, but I do believe it’s a quality business that’s worth a closer look.
Barclays
Value investing requires patience. Barclays (LSE: BARC) stock looks cheap and trades at a 24% discount to tangible book value. However, the bank’s stock has looked cheap for several years. Why should things change in 2016?
The bank’s new management may have timed their arrival well. Analysts expect adjusted earnings to rise to 22.2p per share in 2015, and then to 26.3p per share for 2016. This puts Barclays stock on a 2015 forecast P/E of 10, falling to 8.2 in 2016.
A second factor that may start to attract new buyers is that Barclays is expected to deliver a big dividend hike in 2016. The shareholder payout is expected to rise by 26% to 8.5p next year, giving a prospective yield of 3.9%.
Petrofac
If 2014 was a year to forget for Petrofac (LSE: PFC), 2015 has actually been relatively good. As I write, shares in the oil services provider are 6% higher than they were at the start of the year.
However, Petrofac shares have underperformed those of sector peer Wood Group by 24% over the last two years. Now that Petrofac’s management appears to have got the business under control once more, I think this discount could close.
Petrofac currently trades on 8.1 times 2016 forecast earnings, whereas Wood Group has a 2016 forecast P/E of 12.9. If Petrofac can deliver as expected in 2016, I’d expect the firm’s shares to move onto a higher valuation multiple.
For example, valuing Petrofac at 12 times 2016 forecast earnings would give a share price of about 1,085p. That’s 44% higher than today’s price of 750p. Although there’s some downside risk from the continued weakness in the oil market, I think Petrofac could be a profitable investment over the next few years.
