The S&P 500 fell nearly 5% this week, seeing basic materials as the big loser, with the Materials Select Sector SPDR ETF (XLB, financial) down 6.65%.
This week’s market activity reflects broader underlying economic issues, which have caused a series of steep market declines since the start of the year.
Basic materials exhibit excessive volatility relative to the economic cycle, as the sector is closely tied to widespread consumption.
In light of the bearish outlook for cyclical assets, here are two overvalued core stocks to avoid.
Cameco Corp. (CCJ, Financial) is the world’s largest producer of uranium, supplying about 18% of global demand. The company’s operations span from North America to Kazakhstan, emphasizing vertical integration.
The mining company’s problems go beyond potential price pressure. First, Cameco has several locked assets, with all of its Canadian mines currently under maintenance.
To elaborate, Cameco’s Rabbit Lakes and Crow Butte mines are currently obsolete, while its McArthur River asset won’t reach production potential until 2024.
Additionally, the flagship Inaki mine in Kazakhstan is offline due to supply constraints caused by the Russian-Ukrainian war.
In addition to its operational issues, Cameco’s stock is heavily overvalued. The asset’s quoted price trades at more than 225 times the company’s earnings per share and 2.89 times its book value. Also, Cameco’s dividend yield of 0.33% is not enough, prompting me to classify the stock as overvalued.
Sibanye-Stillwater Ltd. (SBSW, Financial) is one of the bright prospects in the platinum group metals space. However, recent events suggest that its operational efficiency is lacking, which could combine with commodity price pressure to cause a downward spiral in the company’s stock price.
Operationally, Sibanye struggled with a series of labor strikes in South Africa over its gold mines and later its platinum mines. Additionally, a few months ago the company walked away from a $1.2 billion copper-gold acquisition deal with Appian Capital Advisory, dragging the mining company into a long period of costly litigation.
Operational issues aside, Sibanye’s stock is overvalued, trading at 1.12 times book value and 4.89 times earnings per share, which could easily be exacerbated if we enter a global recession.
Sibanye’s dividend yield of 15.01% is considered by many to be “best in class”, but with operational concerns lingering, one has to wonder if the dividend yield is sustainable.
Commodity stocks tend to experience excessive volatility in a bear market. Both Cameco and Sibanye-Stillwater are struggling operationally, putting them in the firing line if the 2022 bear market persists. Additionally, both stocks are overvalued and their dividend persistence is questionable.