Since hitting an all-time early this year, the Materials sector has seen some of the biggest declines in the broad market. And even while today marked a big surge in price for practically every economic sector, Materials still dropped, putting their decline since late January at about -16% and nearly -11.5% year-to-date as measured by the SPDR S&P 500 Materials ETF (XLB). This is a sector that includes some large, well-known names, like Dow DuPont (DWDP), Eastman Chemical Company (EMN), and Freeport-McMoran (FCX), to name just a few. Many of those stocks are, in fact down 20% or more from their own respective highs, which means that this is a sector with a lot of opportunity to consider.
For me, it’s pretty easy to gravitate naturally to many of the larger, more well-known names. When you start to think about important drivers of long-term trends like sector rotation and institutional investment, the big boys usually dominate the discussion. That’s because for institutions like mutual funds, large cap stocks are the easiest to work with; they have the largest number of available shares to work with, and the highest daily volume levels compared to smaller players. When you have tens, or hundreds of millions you need to think about putting to work, those become big questions that you have to deal with. I’m not an institutional investor, but I like to equate tracking sector rotation, and making some of my investing decisions on that basis, to the fly that decides to ride on the back of the elephant as it thunders through the jungle: all the fly has to do is hang on for the ride and it will get much further, much faster than it could get on its own.
As compelling as the notion I’ve just presented may be, the other truth is that sometimes, trying to play the role of fly looking for an elephant to hitch a ride with means passing up a lot of other good opportunities in smaller, less visible and obvious stocks. The market doesn’t pay as much attention to some of these companies, which is why they often trade at much lower prices than their larger brethren, but that certainly doesn’t mean they are any less skilled or effective at working in whatever their particular market niche may be. Sometimes, the best long-term opportunities lie in some of these small companies, simply because as they grow, they could be the companies in the long run that will capture market share from their bigger competition. Their smaller size can make them hungrier, more agile, and more nimble about pouncing on opportunities that could help them reap big benefits down the road.
Rayonier Advanced Materials (RYAM) could be just one of the kinds of companies I’m talking about. This is a stock that has only been trading publicly since mid-2014, and is down more than 66% from the high price it reached shortly after its IPO at nearly $44 per share. Almost half of that decline actually came in the last month, as the stock dropped from around $21.51 to its current level a little $15 per share. That’s a big drop, and if you’ve been holding the stock for any of the last four years, you’ve been enduring a significant amount pain; but this is also a company with a surprisingly impressive fundamental profile given its small-cap size, and an attractive dividend. If this is the first time you’ve heard of the stock, it could be an excellent opening to get on board with a stock that could offer the kind of long-term growth story that is very hard to find.
Fundamental and Value Profile
Rayonier Advanced Materials Inc. is engaged in the production of cellulose specialties. The Company’s product lines include cellulose specialties and commodity products. Its products are used in manufacturing processes. The Company’s products are sold throughout the world to companies for use in various industrial applications, and to produce a range of products, including cigarette filters, foods, pharmaceuticals, textiles and electronics. The Company focuses on producing various forms of cellulose specialties products, such as cellulose acetate and cellulose ethers. The Company’s production facilities are located in Jesup, Georgia and Fernandina Beach, Florida. The Jesup plant can produce cellulose specialties or commodity products using both hardwood and softwood in a pre-hydrolyzed kraft or high potential of hydrogen (pH) cooking process. The Fernandina Beach plant can produce cellulose specialties or commodity products using softwood in a sulfite or low pH cooking process. RYAM’s current market cap is $750.3 million.
- Earnings and Sales Growth: Over the last twelve months, earnings increased more than 445%, while sales growth saw an increase of nearly 170%. In the last quarter, earnings increased almost 58%, while sales growth was more modest at a little less than 4%. The stock operates with a very healthy margin profile; over the last twelve months, Net Income was almost 24% of Revenues, and nearly 10% in the last quarter.
- Free Cash Flow: RYAM’s free cash flow is modest, but still pretty healthy considering the company’s size, and translates to a Free Cash Flow Yield of about 3%.
- Debt to Equity: RYAM has a debt/equity ratio of 1.64 which is admittedly high, but not unusual for stocks in the Materials sector. Liquidity is modest, but adequate; the stock’s balance sheet indicates that operating profits are more than sufficient to service the debt they carry.
- Dividend: RYAM pays an annual dividend of $.28 per share, which translates to a yield of 1.91% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for RYAM is $14.25 per share and translates to a Price/Book ratio of 1.02 at the stock’s current price. Their historical Price/Book average is 3.85, which suggests that the stock is trading at a discount that puts the stock’s long-term target price above the $44 level. If you think that might be over-optimistic, that’s fine; working with the stock’s April high at around $23 provides a more conservative, and perhaps realistic target that is still about 57% above the stock’s current price.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: It’s pretty easy to see the stock’s decline over the past few months, and it could be true that the speed of the stock’s decline since mid-September would scare away a lot of investors. It is that decline, however that is opening the door to the opportunity the stock is offering right now for investors who can recognize the fundamental strength within the company and are willing to bet on their long-term future. The stock is sitting right on top of support right now, with nearest resistance at around $16 from its pivot low in late June. If the stock does continue to drop, it should find its next significant support in the $12.50 price area from consolidation levels the stock held in early 2017.
- Near-term Keys: The short-term downward trend should make it hard to justify a short-term trade on this stock right now; both the size and slope of the stock’s decline from its last high around $21.50 makes a quick recovery or rally difficult to forecast. A break below $14 could offer an opportunity to short the stock or buy put options with a target in the $12.50 per share level; but the best opportunity with RYAM right now really lies in the long-term value proposition I’ve already outlined. The stock could continue to be volatile in the weeks, or even months ahead, but there are a lot of good fundamental reasons to believe the company is well-positioned for growth in the years to come.