The following five stocks have significant upside potential based on their consensus mean price targets and are trading below 52 week highs. The companies are trading on average 62% below their 52 week highs and have 81% potential upside based on the analysts' mean target prices. Vringo Inc. (NASDAQ:VRNG) has the most upside potential. With a mean price target of $10 and the shares currently trading at $3.62 and has 172% upside potential.
Additionally, most of the five stocks have some positive fundamentals and share prices trading below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks that may provide more bang for your buck as it were.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a review of the fundamental and technical state of each company. Furthermore, we will attempt to discern the sector, industry or company specific catalyst for the stocks. The following table depicts summary statistics and Monday's performance for the stocks.
AK Steel Holding Corporation (AKS)
The company is trading 64% below its 52-week high and has 52% upside based on the consensus mean target price of $5.58 for the company. AK Steel was trading Monday for $3.66, up nearly 3% for the day.
AK Steel has some fundamental positives. The company has a forward P/E of 12.62. AKS is expecting EPS to rise by 166%. The company trades for approximately 10% of sales. EPS for the next five years is projected to be 18%.
Technically, the stock had been in a well-defined trading range since June until an announcement last week which drove the stock to new lows. The stock seemed to have found a bottom and bounced off the edge of the lower trend channel trading range.
According to a recent AP report, "AK Steel said it will book a larger than expected loss for the fourth quarter due to lower steel prices and a large income tax charge. AK Steel expects to lose between 67 cents and 72 cents per share in the quarter. That includes a charge of $35 million, or 33 cents per share, related to the value of AK Steel's deferred tax assets. The company said it will ship more steel than it did in the third quarter, but prices will fall by about 5 percent. In addition, AK Steel is selling 25 million shares of its stock. The company plans to use the proceeds from the offering to repay debt and for general purposes. The banks managing the offering can buy another 3.8 million shares."
I posit the selloff of shares has been overdone. At the very least the news has been well priced in at this point. This is a buying opportunity.
Advanced Micro Devices, Inc. (AMD)
The company is trading 77% below its 52-week high and has 52% upside based on the consensus mean target price of $2.92 for the company. AMD was trading Monday for $1.92, up over 3% for the day.
AMD has some fundamental positives. The company trades for approximately 25% of sales and 1.39 times book value. EPS for the next five years is projected to be 6%. AMD has $1.83 in cash per share. Insider ownership is up 57% over the past 6 months.
Technically, the stock had been the definition of a falling knife but seems to have found a bottom at the current level. The stock is currently oversold according to the RSI indicator which is 29.
AMD is struggling due to the decline of the PC. The company has been unable to break into the tablet market and its revenues are dropping precipitously. I believe the bad news has been priced in, but do not see a near-term catalyst on the horizon. I am avoiding the stock for now but keeping it on my watch list.
Groupon, Inc. (GRPN)
The company is trading 88% below its 52-week high and has 65% potential upside based on the consensus mean target price of $5.12 for the company. Groupon closed Monday at $3.11, up 4% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 12.94 and trades for 7 times free cash flow. EPS and sales are up substantially quarter over quarter. EPS next year is expected to rise by 41%.
Technically, the stock is in a well-defined downtrend, yet has leveled off and seemed to find a bottom at the $5 mark until it reported an earnings miss on November 8th and took a major nosedive to the $3 level.
I have previously been bearish on the stock, but with the recent drop in share price I feel all the bad news has been priced in. The risk reward at this level is favorable to long trades. According to a recent article in the WSJ, Tiger Global Investments LP disclosed a 9.9% stake in Groupon on Monday in a filing with the Securities and Exchange Commission. I see this as a very positive development. Tiger knows what they are doing when it comes to internet startups. The stock is a buy here.
Rambus Inc. (RMBS)
The company is trading 52% below its 52-week high and has 60% potential upside based on the consensus mean target price of $7.33 for the company. Rambus closed Monday at $4.57, up over 12% for the day based on an upgrade from JPM to a Buy.
Fundamentally, the stock has positives. The stock trades for 1.53 times book value and EPS is expected to rise by 70% next year. EPS is expected to rise by 10% for the next 5 years. Gross margin on sales revenue is 88%.
Technically, the stock has been in a well-defined trading range between $4 and $6 for the past few months with a slight downward trend. The technical state of the stock is poor.
According to a recent Barrons article, Rambus was up big Monday after JPMorgan's Paul Coster elevated his rating on the stock to Overweight from Neutral with a $7 price target. Coster states after a 46% fall this year the shares are "de-risked."
At $4 to $5 the shares are supported by contracts in the bag for Rambus's semiconductor business group, by cash on hand of $212 million, and the break-up value of LED lighting technology and its cryptography division, CRI. A settlement with South Korean chip maker SK Hynix could offer further upside.
I agree with Coster and feel the stock is primed for a rebound. The stock hit the $4 mark once previously this year and went on quite a run thereafter. The risk/reward ratio is positive at this level. I like the stock here but would wait for it to cool down some prior to starting a position after the huge pop.
The company is trading 37% below its 52-week high and 176% above its consensus mean target price of $10.00 for the company. Vringo was trading Monday for $3.62, up over 2% for the day.
Fundamentally, Vringo has some positives. Vringo's institutional transactions are up 135% in the past three months. The company has a gross margin of 74%. EPS this year is up 40%.
Technically, the stock is stuck in a trading range between $3 and $6 with volatile swings from top to bottom of the trend channel. This is standard behavior for patent lawsuit plays. Currently the stock is resting near the bottom of the channel.
Vringo is a patent play. Patent plays are not about the fundamentals, they are about winning a patent case. The stocks involved often have wild swings as motions and appeals are won and lost. Most recently, Vringo filed a lawsuit against ZTE in Germany alleging infringement over wireless network infrastructure components.
Vringo is a speculative play, but is now trading near the bottom of the recent trend channel. James Altucher recently penned a very detailed article articulating that the company could be worth at least $2 billion in a best case scenario. This would mean a share price of $18. He also outlines a worst case scenario basically stating the shares are priced at a modest discount currently.
If you were inclined to buy into the story, now would not be the worst time to do it. As I have stated previously, I believe a portion of a portfolio should be dedicated to speculation, and this is definitely a speculative buy.
The Bottom Line
Sometimes a bargain is a bargain and sometimes it is not. Starting off with stocks that have strong upside potential and solid fundamentals takes some of the downside risk out of the equation. Nevertheless, you must always dig deeper to see what the future may hold. Everything is not always as it appears.
Most of these stocks are in the process of rebounding off a bottom. The difference is AMD is facing headwinds rather than catalysts. Furthermore, the technical state is not as strong as I would like to see it. If I had to pick one stock out of these to buy it would be Groupon. The risk/reward ratio is extremely positive and the stock trading for 7 times free cash flow. Plus you have Tiger involved which makes me sleep better at night.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk.
Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.