The market has priced in multiple risks associated with VALE:
Taxation: Corporate taxes are 34%, with double taxation on outside factors.
Emerging Market: VALE is located in Brazil, and is therefore is a target of bias. remains around 5-6%.
Volatility: EPS and revenues are volatile due to supply/demand of , and overall pricing (i.e. China). However iron ore prices are unlikely to drop below $90 for an extended period of time.
Summary: VALE will continue to remain an industry leader. Their break-even for iron ore is $75 against the $100+ price. I created a position at $12.40 (50k) on Friday and will grow my position provided the broader market experiences enhanced selling or a correction. Short term fears could also drop their market cap closer to $60 billion, which would be a steal. Price target of $18 min, $24 max (time interval is 1-2 years).
Good luck to longs! :)
There is only 15% institutional ownership, meaning the big traders control the inflow and outflow of money. But the selling is turning to exhaustion. The short float isn't kept very high because it's traded for a few % (then covered). They are also a large company. This is a clear case of the Elliot Wave Theory that most people don't seem to recognize. It's obvious with commodities and associated securities. From the beginning of 2011 until now. The first wave down was 4x, in 2012 it was 3x, 2013 was 2x, and this year is 1x.
Directional Money Flow hasn't shown a distinct bullish movement yet. But technicals are bottoming and really don't want to move much lower. Buying within the $12.50 and 10 range is a safe idea. Mike also mentioned the high put selling volume, that's the first indication of a reversal on a descending channel like this one.
Now I am finally willing to place my money in favor. Long VALE.
We also saw quite a bit of put selling at $12. I think we are edging closer to a bottom. A large dividend with plenty of room for capital appreciation makes this an A+ investment in my book. Going to start buying..
P.S. Not sure if you considered this, but it is EXTREMELY unlikely that VALE will head below $10. Not only is it a financial crisis case scenario, but that would issue a price to earnings of 5. That's actually laughable for a "best of breed" multi-billion dollar company.
Going to sell some of my WFC and buy VALE.
The RED states "expensive from a value standpoint...iron ore prices were unrealistic and so were analyst estimates." The BLUE states "fairly valued range. VALE has shown consistent EPS/revenue growth between 6-11x range. Their forward p/e is 6.86..." The GREEN states "oversold/cheap area. EPS has been driven lower based on the volatility of the industry. Trading under $65 billion mrkt cap makes this very attractive."
The discrepancy between iron ore and VALE's valuation is pretty apparent in my opinion. One of the primary causes of the "avoid" mentality for Brazil, and VALE inclusively, is because of current federal reserve monetary policy. Since tapering was enacted, EMs have seen nothing but a downward trend due to reduced LIQUIDITY, which is by default exhibited in the short term. However, this creates an opportunity for purchasing opportunities in the areas most effected. In other words, emerging markets have seen a large amount of risk already priced in. Seeing not just ordinary companies, but strong corporations trade at 4-7x, so downside is inevitably limited provided the global economy sees continued improvement.