5 Stocks Still Focused on Opportunity

07/23/2012 8:45 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

Maybe it's the summer doldrums, but the media has lost sight of some important stories that investors should stay on top of, writes Stephen Leeb of The Complete Investor.

With all the electioneering going lately on in the US, we think some important observations have gotten lost in the weeds, virtually ignored by the news media.

First is the recent ruling by a specially appointed investigative committee in Japan charged with determining the precise causes of that nation’s Fukushima Daiichi nuclear plant disaster in March of last year. It was widely expected that the committee would conclude the meltdown of the plant’s nuclear reactors was not the result of the earthquake itself, but rather of the more unexpected and unpredictable massive tsunami it set off.

There’s an important distinction here, in that a tsunami is a considerably rarer event in Japan than an earthquake, and therefore not something you can predict or prepare for to the same extent. Whereas earthquakes—even large ones—are very common in that country, common enough that nuclear plants should be expected to be fully prepared for them.

So if the investigative committee were to say, as was generally assumed, that it was the earthquake, not the tsunami, that caused the Fukushima disaster, it would provide more justification for reopening and restarting Japan’s nuclear plants, especially those whose water supply do not depend on the ocean and are not located near the ocean, where they could again be so dramatically affected by a tsunami.

The big surprise was that the committee did not reach that conclusion, but in fact said that you could not rule out the fact that the earthquake, by itself, could have created the kind of damage that would cause at least a partial meltdown.

This sort of outcome suggests that it’s going to be back to the drawing board for the Japanese when it comes to energy—i.e., the Japanese will be forced to rely on other forms of energy besides nuclear. And this opens the door much wider than ever before to Japan’s pursuit and development of alternative, green energy sources—with all the economic and investment implications that involves. Among these are the great need for other resources ranging from silver to copper to oil to LNG and, of course, to the machinery for extracting these resources.

Another observation that hasn’t received much, if any, notice recently is that for the first time, rightly or wrongly, particular climate events such as the drought in Texas have been directly related to long-term climate models.

Keep in mind that what you are reading here is from someone who has never been an apologist for climate environmentalism; rather, I have always been convinced that whatever the particular models the climatologists come up with, they would never be nearly sophisticated enough (despite all the data and computing power behind them) to account for the multiplicity of variables and their interrelationships in defining climate change.

At the same time, I’ve always felt that it was inconceivable that our species was not doing some damage, in some way—though I’ve been skeptical about our ability to accurately quantify it, and that’s still my belief.

In any event, right now what I’m really talking about comes down more to political currents and pressures, rather than science and the probabilities that climate events are caused by this or that. But if extreme weather continues, and even if it is random and has nothing to do with longer-term man-made changes, it is still more likely than it’s ever been to have an effect on energy policy.

Now, for reasons that aren’t completely clear to me, the causes of climate change have taken on major political overtones. There is a political contingent that doesn’t believe in climate change, just as there’s a political contingent that does—and this whole area has become one more political and ideological battleground among many others.

But to propose a pertinent thought experiment: suppose those climate-change naysayers wake up one morning in their Washington DC or Virginia or Maryland homes feeling extremely warm, despite the fact that the air conditioning has been on all night. And then they look at a thermometer outside and see it registering a temperature of 125 degrees Fahrenheit at 8 o’ clock in the morning.

Or perhaps more realistically, imagine that Midwest temperatures get even hotter and the drought becomes even more severe. Corn prices, as a result, surge to $15 or more a bushel. (Right now, corn is nearing record highs of $8 a bushel).

Suddenly, what had been a political issue and ideological debating point would become a national crisis, just like that. This is not a prediction, but a statement about how the sensitivity to extreme weather events has significantly increased. Weather, in other words, suddenly could become a catalyst for a war-like effort to develop alternative energies and dig up all the resources such an effort would require.

As for the investment implications, the beneficiaries of the situations that we’ve described here regarding Japan and the US will be companies that are related to green technologies in one way or another, including mining and mining-related companies involved in the extraction of the metals and resources so essential in the new renewable/green energy technologies.

So the scope is very wide indeed: not only are we talking silver plays, but companies that range from Johnson Controls (JCI), whose Building Efficiency business unit is a leader in its field, to mining service companies, which include mining machinery and equipment manufacturers like Joy Global (JOY); Caterpillar (CAT); the Japanese company Komatsu (KMTUY); and the Sweden-based Atlas Copco (ATLKY).

Finally, to cite further support for the stocks of these companies: all of them on average…

  • are trading at price-to-book value ratios comparable to their lowest points during the 2008 crisis
  • pay dividend yields of about 3%
  • have single-digit P/Es

All these companies deserve much better metrics, even without consideration of anything related to climate change or Japan. And here it’s a question of perspective. We all know how hard it is to notice someone’s hard-won weight loss if we see that person every day, as opposed to seeing them only once a month or every two months.

And so it is with the whole resource situation. While everyone is keenly aware that prices for natural resources have been dropping this year, we seem to have lost track of the fact that almost every natural resource that’s important—for building out new energies or just for continuing to run our world—is trading at many times higher than it was in the 1990s and in the wake of the 2008 collapse.

And this is despite the fact that the two largest economic blocs in the world—the EU and the US—are likely to have combined five-year growth rates in negative territory.

While this clearly puts to lie all the negative thinking about China, it also suggests that these critical resources are becoming harder and harder to find. In almost all cases, the low-hanging fruit has already been picked, and these mining companies, so sharply down, so cheap by any metric, are likely to be very strong buys.

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