Basic Materials Stocks, Including BHP Billiton, Making Big Moves on September 20, 2012

By Investopedia Staff | September 20, 2012 AAA

The market is having a bad day so far: the Nasdaq is down 0.3%; the S&P 500 has declined 0.3%; and the Dow has decreased 0.1%. The basic materials sector is the category of stocks that accounts for companies involved with the discovery, development and processing of raw materials. This sector includes the mining and refining of metals, chemical producers and forestry products. The basic materials sector is sensitive to changes in the business cycle. Because the sector supplies materials for construction, it depends on a strong economy. This sector is also sensitive to supply and demand fluctuations because the price of raw materials, such as gold or other metals, is largely demand driven.

The Basic Materials sector (XLB) is down 0.8%, underperforming the market overall. The current biggest movers in the sector are:

Company Market Cap Percentage Change
Cliffs Natural Resources (NYSE:CLF) $6.17 billion -3.9%
Rio Tinto plc (NYSE:RIO) $96.45 billion -2.9%
Eastman Chemical (NYSE:EMN) $7.96 billion -2.5%
BHP Billiton plc (NYSE:BBL) $173.89 billion -2.2%
BHP Billiton (NYSE:BHP) $190.06 billion -2%
CF Industries (NYSE:CF) $13.78 billion -1.9%
Terra Nitrogen Company (NYSE:TNH) $4.11 billion -1.7%

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Falling 3.9%, Cliffs Natural Resources (NYSE:CLF) is currently at a share price of $41.22. With five million shares changing hands so far today, the company's volume is 0.4 times its current three-month average. Price change alone is not enough to know how a stock is doing. Volume is an important secondary indicator used to confirm trends suggested by price movement. Looking at a company's valuation ratios is a good way of getting a basic idea as to its value as an investment. The debt ratio is calculated by dividing total liabilities by total assets. CLF's debt ratio is 58.6%. As with all financial ratios, a company's debt ratio should be compared with the industry average or similar companies.

Rio Tinto plc (NYSE:RIO) has fallen 2.9% and is currently trading at $49.95 per share. This morning, the company is trading a volume of 1.8 million shares. Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made a strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move. Understanding investment valuation ratios allows an investor to assess the true value of an individual stock. As with most ratios, comparisons of company price/earnings to growth ratios (PEG ratios) are most appropriate for similar companies. RIO's PEG ratio is 1.02. Because of the adjustment for earnings growth rate, the PEG ratio is somewhat more useful than many formulas for comparing companies in different industries.

At $56.68, Eastman Chemical (NYSE:EMN) has slipped 2.5%. So far today, the company's volume is 628,008 shares, in keeping with its current daily average. Volume is an important indicator because it indicates how significant a price shift is. A wide array of ratios can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. A company's capitalization (not to be confused with its market capitalization) is the term used to describe the makeup of a company's permanent or long-term capital, which consists of both long-term debt and shareholders' equity. EMN's capitalization ratio of 64.3% is relatively high. The company may have trouble meeting operating and debt liabilities on time and surviving adverse economic conditions. Prudent use of leverage (debt) increases the financial resources available to a company for growth and expansion.

BHP Billiton plc (NYSE:BBL) is currently trading at a share price of $63.42, a 2.2% decline. So far today, the company's volume is 476,793 shares. This is on pace to reach yesterday's trading volume of 1.1 million shares. Volume is also used as a secondary indicator to help confirm what the price movement is suggesting. Valuation ratios include the price to earnings (P/E) ratio, the price to earnings growth (PEG) ratio, the price to sales (P/S) ratio, the price to book (P/B) ratio, and the dividend yield. One of the most important estimates of stock market valuation is the price/earnings ratio (P/E ratio). Compared to the industry average of 5.89, BBL's P/E ratio of 7.6 is quite high. Generally speaking, the higher the P/E ratio, the higher the market expectations for a company's future performance. To determine the P/E ratio, an investor divides the market price of the stock by the earnings-per-share (EPS) of the stock. SEE: Profit With The Power Of Price-To-Earnings

Falling 2%, BHP Billiton (NYSE:BHP) is currently at a share price of $69.73. The company's volume for the day so far is 1.1 million shares, 0.4 times the current three-month average. High volume indicates a lot of investor interest while low volume indicates the opposite. In making a decision about a potential or existing investment, valuation ratios are useful as a basis for seeing whether the stock price is too high, reasonable, or a bargain. The price/book value ratio is one of the more common methods of determining whether a stock is fairly valued. BHP's stock is trading for more than its book value with a P/B ratio of 2.94. It is important to take the company's debt into account when using the P/B ratio as debt can boost a company's liabilities to the point where they wipe out much of the book value of its hard assets, creating artificially high P/B values. A weakness of the P/B value ratio is that while the price component is easily determined by looking at the stock quote, the book value component is more difficult to estimate and more open to individual interpretation and analysis. SEE: How Buybacks Warps The Price-To-Book Ratio

After a decline of 1.9%, CF Industries (NYSE:CF) has hit a share price of $218.61. So far today, 628,658 shares have changed hands. When a stock price moves up or down, watching the volume is a good way of identifying how significant that shift is. While investment valuation ratios are useful tools in estimating the attractiveness of an investment, remember that it is important to look at a company's historical performance and compare the company ratios with its competitors and industry overall. The dividend yield is measured by taking the annual dividends per share and dividing that number by the stock price. CF has a dividend yield of 0.7%, which is fairly low. This could indicate that that the stock is overpriced or that future dividends might be higher. A higher dividend yield may indicate a risk of a fall in the price of the security, or a cut in the level of dividend payments, either of which would have the effect of dropping future returns. SEE: Dividend Yield For The Downturn

Slipping 1.7%, Terra Nitrogen Company (NYSE:TNH) is currently trading at $217.28 per share. At 10,191 shares, the company's volume so far today is 0.4 times the average daily volume. As a stock moves up or down, it is important to pay attention to the trading volume. This indicates the level of interest: the higher the volume, the more the interest. When estimating the value of a particular investment, valuation ratios provide a good basis for assessing the value of an individual stock. The price/sales ratio is used for spotting recovery situations or for double-checking that a company's growth has not become overvalued. TNH's P/S ratio of 4.97 is on the high side. In young companies, a high P/S ratio is a sign of sales growth that is expected to turn into earnings and cash flow. It is important to keep in mind when looking at the P/S ratio that just because a company is generating revenues, this does not mean that the company is profitable, and in the long run, profits drive stock prices.

The Bottom Line On any given day, a particular stock may see positive or negative change in its share price. Paying close attention to the previous ratios will help you identify key times to adjust your strategy. However, these fundamental metrics must be analyzed with historic data, industry information in addition to firm specific financial statements.

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