The stocks covered in this article have major EPS growth expected for next year. On average, these five companies are projected to grow EPS by 150%. Micron Technology Inc. (MU) has the highest projected EPS growth at 348% while Sprint Nextel Corp. (S) has the lowest, yet still significant, at 45.90%.
Each time you consider starting a position in a stock, you should prudently scrutinize its EPS information. EPS growth is the financial objective businesses strive to achieve and investors watch closely.
Additionally, the five stocks are trading at or below $10. Stocks trading for $10 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 or more bang for your buck so to say.
Finally, these are U.S. S&P 500 stocks with market caps of $2 billion or greater that are trading for significantly less than book value. Sprint is the exception and trades for twice its book value yet at a discount to the industry average.
The question is, is it really time to buy or sell? A stock that appears to be a bargain based on fundamentals, but has no near term catalyst for recovery, could be dead money for quite some time. The fundamentals trap investors into buying the stock and it never improves. Sector, industry or company specific headwinds that have not yet been factored into current prices may be on the horizon. You cannot rely on one aspect of a stock to determine whether it is time to buy or sell.
In the following sections, we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any up or downside potential exists based on sector, industry or company specific catalysts. The following table depicts summary statistics and Tuesday's performance for the stocks.
Alcoa, Inc. (AA)
The company is trading 23% below its 52-week high and has 26% potential upside based on the consensus mean target price of $10.41 for the company. Alcoa was trading Tuesday for $8.28, down slightly for the day.
Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.18. Alcoa is trading for 65% of book value. The company pays a dividend with a yield of 1.45%. Alcoa's projected EPS growth rate for next year is 162%.
Technically, the stock has broken through all support levels and is currently trading 6% below the 50-day sma which is bearish. On the other hand, the risk/reward may favor long trades at this point with the stock testing the lows for the year at the $8 mark and bouncing higher.
If you are a long-term investor, this could be a chance to pick up Alcoa at its lows. The stock bounced off $8.00 in July and had a significant run to nearly $10. Alcoa stated in its last conference call it expects aluminum prices to double by 2020. The recent weakness in the stock was due to a recent drop in prices of 17%. You have to buy low to sell high and this may be that opportunity. With the price of aluminum dropping Alcoa has become lean and mean. When an uptick occurs I expect them to rebound nicely.
Bank of America Corporation (BAC)
The company is trading 4% below its 52-week high and has 5% potential upside based on a consensus mean target price of $10.16 for the company. BAC was trading Tuesday at $9.66, down 2% for the day.
Fundamentally, BAC has several positives. BAC insider ownership has increased by 51% over the past six months. The company has a forward P/E of 9.96. BAC has a net profit margin of 6.08%. BAC is trading for approximately 44% of book value. EPS next year is expected to rise by 131% and the company pays a dividend with a yield of .41%.
Technically, BAC has been looking good. The stock broke out of a descending triangle to the upside at the beginning of August. The coveted golden cross was fulfilled earlier this year. The stock has been in a solid uptrend since mid-July.
Bank of America has a fortress balance sheet and is well positioned to take advantage of the uptick in the U.S. housing market. Bank of America was recently upgraded to Buy from Hold at Stifel Nicolaus. The analysts noted the bank's success at cutting costs, its much-improved capital position, and the likelihood of higher capital returns. The stock is a solid buy at this level.
Southwest Airlines Co. (LUV)
Southwest is trading 7% below its 52 week high and has 22% upside based on the consensus mean target price of $11.33 for the company. Southwest was trading Tuesday for $9.29, down 1% for the day for the day.
Fundamentally, Southwest has many positives. Southwest trades for 8 times free cash flow. The company has a forward P/E of 10.21. EPS next year is expected to rise by 65%. Insider ownership is up 80% over the last six months. The company is trading for book value and has a PEG ratio of .79.
Southwest's stock achieved the golden cross, where the 50 day sma eclipses the 200 day sma earlier this year. This is considered to be a very bullish sign for a stock but Southwest has remained somewhat flat. The combination of lower oil prices and zero exposure to Europe make this stock very appealing yet it hasn't really moved. This may be a value trap rather than a trade. I would avoid Southwest for now.
Micron Technology Inc.
The company is trading 38% below its 52 week high and 59% potential upside based on the consensus mean target price of $9.04 for the company. Micron was trading Tuesday for $5.68, down slightly for the day.
Fundamentally, Micron has some positives. Micron is expecting EPS to be up significantly next year according to Finviz.com. Micron is trading for approximately 75% of book value and 70% of sales. Micron insider ownership has increased by 85% over the past six months.
Technically, Micron is in a long-term downtrend. Nevertheless, the stock may have found a bottom. It recently broke through the first resistance level at the 20-day sma and is testing the top of the current downtrend channel. The stock has tested the $5.50 mark four times this year and bounced back higher each time.
Micron is trading for less than book value and has a significant opportunity if they can complete the purchase of Elpida, a supplier to Apple (AAPL). The completion of the purchase should enhance the company's fundamentals and competitive edge. I believe the risk/reward is favorable for the longs here with the stock trading just above this year's low and has gone on a significant run at this time each of the last two years. The stock is a buy here.
Sprint Nextel Corp.
The company is trading 7% below its 52-week high and has 12% upside based on the analysts' mean target price of $6.32 for the company. Sprint was trading for $5.63 on Tuesday, up slightly for the day.
Fundamentally, Sprint has some positives. Sprint is trading for 2 times book value and only 50% of sales. EPS next year are expected to rise by 45.90%.
Technically, Sprint is neither overbought nor oversold. The stock achieved the golden cross at the end of June and proved the bullish indicator true. This is the beginning of a long-term rally. The stock is currently under accumulation and hugging the 50-day sma.
Sprint is the only company that offers the Apple iPhone with unlimited data, which is driving subscriber growth. The company is cleaning up the balance sheet and executing well on operational objectives. Sprint recently received an offer from Softbank (OTCPK:SFTBF) to buy a majority stake in the company. SoftBank has also suggested it's willing to make additional moves. Leap Wireless (LEAP) is a name that inevitably comes up whenever U.S. mobile consolidation is a subject. I believe Sprint shareholders will eventually come out on top and the deal will be accretive. The stock is a buy long-term.
The Bottom Line
Sometimes a bargain is bargain and sometimes it is not. Starting off with stocks projecting solid EPS growth 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 and are undervalued. If I had to pick one stock out of this list to buy right now it would be Micron. The one to avoid is Southwest. Even though the fundamentals are flashing buy, I posit this is a value trap.
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. Set a 5% trailing stop loss to minimize losses even further if you wish.
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.