Recent news that Chinese and other Asian manufacturing surveys were positive raised hopes that global growth is improving at last. Furthermore, recent reports note that the U.S. and Chinese car markets are poised to grow substantially in the coming years.
J.D. Power & Associates and LMC Automotive recently stated auto sales in the United States are rebounding after Superstorm Sandy and should be up 12% year over year. According to McKinsey & Co., China's passenger-vehicle sales will expand by an average 8 percent a year to reach 22 million in 2020, driven by demand for SUVs and rising incomes in smaller cities. This news bodes well for the stocks covered in this article.
The stocks covered in this article are currently trading vastly below their all-time highs, yet I believe have the potential to rebound. Based on the prospects for an uptick in car sales and more importantly global growth, these stocks seem well positioned to benefit going forward.
The stocks selected are trading on average 32% below their 52-week highs and have 30% upside potential based on analysts' estimates. AK Steel Holding Corporation (AKS) has the most upside at 45% while United States Steel Corp. (X) has the least upside at 17%. These facts alone carry little weight, but it's a good starting point when looking for buying opportunities.
In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table depicts summary statistics and Friday's performance for the stocks. The following charts are provided by Finviz.com.
AK Steel Holding Corporation
The company is trading 62% below its 52-week high and has 45% upside based on the consensus mean target price of $5.58 for the company. AK Steel was trading Monday for $3.84, up nearly 2% for the day.
AK Steel has some fundamental positives. The company has a forward P/E of 13.03. 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.
AK Steel recently sold 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.
After, Goldman Sachs upgraded AK Steel from Sell to Neutral with a price target of $3.50. The firm commented:
"The stock has traded off 34% since completing its secondary, convert and bond offerings last week and is now close to our target price. We believe that, with the recent capital raise, AK Steel's balance sheet concerns have diminished in the near to medium term and we do not see any further company-specific negative catalysts on the horizon. Since being added to the Sell List on June 10, 2012, AKS is down 26.7% versus the S&P 500 up 6.0%. Over the past 12 months, AKS is down 56.5% versus the S&P 500 up 14.1%."
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 and I have started a position.
Ford Motor Co. (F)
The company is trading 14% below its 52-week high and has 32% upside based on the analysts' mean target price of $14.67 for the company. Ford was trading Friday for $11.09, up over 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 7.48. Ford is trading for 10.46 times free cash flow and slightly over two times book value. EPS next year is expected to rise by 10%. The company pays a dividend with a yield of 1.83% and has a PEG ratio of 0.47 and a net profit margin of 13.36%.
Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since the last quarter. The stock has posted higher highs and higher lows since the start of August. Mulally is staying around till 2014, sales and profits are up and the recent storm has not affected production. The stock remains a buy long-term.
Freeport-McMoRan Copper & Gold Inc. (FCX)
The company is trading 19% below its 52-week high and has 27% upside potential based on the consensus mean target price of $49.00 for the company. Freeport was trading Friday for $38.71, up over 1% for the day.
Fundamentally, Freeport has several positives. Freeport pays a dividend yielding 3.27%. The company has a forward P/E of 8.16. Freeport is trading for 2.12 times book value. EPS next year is expected to rise by 44.75%. The company has a net profit margin of 22.08% and an ROE of 18%.
Technically, Freeport was in a well-defined uptrend from mid-June until mid-September. The stock went parabolic after the Fed announced a new round of QE was forthcoming. The recent pullback is healthy for the stock technically. At the beginning of October the coveted golden cross was achieved where the 50-day sma crosses above the 200-day sma. If you follow my articles you will know this has been a very effective indicator for picking winners for me. The stock is a buying opportunity here after bouncing off support at the 200-day sma. This is an ideal time to start a long-term position in Freeport.
General Motors Company (GM)
The company is trading 9% below its 52-week high and has 30% upside based on the analysts' mean target price of $32.94 for the company. GM was trading Friday for $25.12, up over 2% for the day.
Fundamentally, GM has several positives. The company has a forward P/E of 6.60. GM is trading for 36 times free cash flow and slightly under book value. EPS next year is expected to rise by 15%. The company has a PEG ratio of 0.82 and a net profit margin of 3%.
Technically, GM is currently in a well-defined uptrend. The stock has been in a solid uptrend since late July. The stock has posted higher highs and higher lows since the start of August. Near the end of October the coveted golden cross was achieved which is bullish. The stock is currently hugging the bottom of the uptrend channel which is usually an opportune time to start a position. GM is firing on all cylinders in China. I like the stock here.
United States Steel Corp.
The company is trading 33% below its 52-week high and has 17% potential upside based on the analysts' consensus mean target price of $25.17 for the company. US Steel was trading Friday for $21.49, down nearly 1% for the day.
Fundamentally, US Steel has some positives. The company has a forward P/E of 12.12. US Steel is trading for 81% of book value. EPS next year is expected to rise by 113%. Insider ownership is up 27% over the past six months and the company pays a dividend of around 1%.
Technically, the stock looks poised to break out in the coming months. The stock tested resistance at the bottom of the slight uptrend channel four times over the past few months and recently broke through resistance at the 50-day sma.
The company is down almost seven-fold from its 2008 high of $180. I see this as a chance to get into the stock before things start to really turn around. The stock is a buy here.
The Bottom Line
The focus of the markets is on the looming Fiscal Cliff. I see any potential sell off as a buying opportunity. The prospect of a return to stronger global growth and positive news on car sales should spur a rally in these names. I see significant growth potential for these stocks as the global growth story unfolds. Furthermore, I posit the Fed's and other central banks' QE programs and other economic stimulus procedures will underpin these stocks and the equity market in general going forward as well.
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. Build the position slowly. Even though these are long-term buys, one of the key factors effecting ROI is your cost basis.
Disclosure: I am long AKS.
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.