To find ridiculously cheap stocks, you need think outside the box.
If others are ignoring a segment of the market, odds are these companies will be mispriced. Small-cap stocks in niche industries are often egregiously mispriced.
Since 2017, a certain small-cap stock has shed nearly $1 billion in value, pushing its market cap down to just under $900 million. The fall has pushed its dividend up to an astounding 13%!
You may be skeptical, but this company has paid the same dividend for nearly 15 years straight without ever cutting the payout.
With a rock-bottom valuation and outstanding dividend, you need to give this stock a closer look.
This is niche
Chemtrade Logistics Income Fund (TSX:CHE.UN) is a niche company.
You’ve likely never heard of most of its business lines, but you can think of its as an industrial chemicals company. It manufactures a wide range of chemicals using its own production facilities, selling them to customers on long-term contracts.
What kind of chemicals you may ask? It makes stuff like sulphuric acid, carbon disulphide, ammonium sulphate, aluminum chlorohydrate, and vaccine adjuvants.
Those were a lot of fancy words, but here’s what you need to know: Chemtrade’s customers require these chemicals to stay in business, and Chemtrade is typically the lowest-cost producer, so why go anywhere else?
Industrial chemicals are all about scale. If you’re the biggest, you’re likely the cheapest. Because Chemtrade is either the largest or second-largest competitor in its core markets, it doesn’t have a problem attracting and retaining a large customer base.
It has also diversified its business across numerous geographies, materials, and end markets, reducing the impact of volatility in any one segment.
Like I said, this is a niche business, but it’s delivered fantastic returns to shareholders for nearly two decades.
The share price is still at 2001 levels, but the $0.10 per share monthly dividend hasn’t changed, resulting in long-term annual returns of more than 10%.
Now is your chance
Selling commoditized chemicals can be a messy business.
As we learned before, Chemtrade has done a terrific job establishing low-cost leadership positions. That combined with diversifying its revenue sources in several ways has helped it avoid major missteps— until now.
In the first quarter, the company posted a surprise loss of $29.3 million, down from a $6.9 million profit the year before.
The loss stemmed from one-time items like higher litigation reserves and financing costs. Excluding these items, revenues, EBITDA, and operating cash flow were actually up.
The stock price has shed 50% of its value, but management is still confident in its long-term trajectory. On June 19, it reaffirmed its monthly dividend, representing nearly 60 quarters straight maintaining the payout.
Over the last 12 months, the underlying businesses still produced roughly $63 million in free cash flow. Now trading at a $870 million market cap, that’s good for a free cash flow yield of 7.2%.
After the latest quarters roll off the books, expect the stock to re-rate quickly. In the meantime, you’ll receive an outsized 13% annual dividend.
