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Vale: A Giant in Ore

09/23/2013 7:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

How about buying a company that is selling for eight times expected earnings, pays a solid 4.7% dividend, and sells slightly above its book value? asks Mark Skousen, editor Hot Commodities Alert.

The company is Vale S.A. (VALE), the giant iron ore producer and exporter in Brazil, and the world's second-largest mining company. Vale derives more than 60% of its revenue from iron ore.

Until recently, the stock was trading lower, from a high of $35 a share in 2011. Commodities like iron ore have drifted lower; iron ore, at one point a year ago, was selling for $100 per metric ton.

Earnings plunged 83% to $2.3 billion on revenues of $46 billion. In July, the stock hit a new 52-week low. It had to cut its dividend from 58 cents to 44 cents in April.

But now things are looking up and Vale seems poised to move substantially higher. Demand from China is picking up and prices of iron ore have turned around.

With the company realizing $1.6 billion in cost savings during the first half of 2013, it now is well positioned to take advantage of the bounce prices.

The stock price tends to do well in the fall. It recently crossed its 200-day moving average and is still in bargain territory, selling at under eight times estimated earnings for 2014.

The price/earnings to growth (PEG) ratio is only 0.43 (anything less than 1 is considered excellent).

It has $7 billion in cash, which is plenty to cover the interest on its $36 billion in debt. Let's buy VALE at market and set a protective stop of $13 a share here.

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