The stocks covered in this article have major EPS growth expectations based on strong underlying catalysts for organic growth. On average, these five companies are projected to grow EPS significantly next year or over the next five years. AK Steel Holding Corporation (AKS) has the highest projected EPS growth at 125.80% while SIRIUS XM Radio Inc. (SIRI) has the highest EPS growth rate over the next five years at 27.80%. 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 $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 or more bang for your buck so to say.
Finally, these are stocks with strong catalysts for future growth. 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 only on the fundamentals of a stock to determine whether it is time to buy or sell. You have to look at the big picture.
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 potential exists based on sector, industry or company specific catalysts. The following table depicts summary statistics and Monday's performance for the stocks.
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AK Steel Holding Corporation
The company's EPS is expected to grow by 125.80% next year. The company is trading 60% below its 52-week high and has 32% upside based on the consensus mean target price of $5.42 for the company. AK Steel was trading Monday for $4.12, up almost 1% for the day.
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AK Steel has some fundamental positives. The company has a forward P/E of 16.48. AKS is expecting EPS to rise significantly next year and by 27% over the next five years. The company trades for approximately 10% of sales.
Technically, the stock had been in a well-defined trading range since June until mid-November when they announced the sale of additional stock to shore up their balance sheet. The stock seemed to have found a bottom at $3 and began moving higher as it consolidates.
There are several reasons AKS should rebound. Goldman Sachs and Dahlman Rose upgraded AK Steel to Hold from Sell citing they believe the implications of recent debt and equity issues have been priced in and near-term liquidity risk has been removed.
Furthermore, Chairman and CEO James Wainscott's recently purchased 100K shares at $3.845 each. Finally, AKS said Monday it will increase current spot market base prices for all carbon flat-rolled steel products by $30 per ton, effective immediately with new orders.
I like it when the CEO puts his money where his mouth is, the company is raising prices and taking actions to shore up the balance sheet. I posit this is a buying opportunity in AKS at this level.
Alcatel-Lucent, S.A. (ALU)
The company's EPS is expected to grow by 66.70% next year. The company is trading 58% below its 52-week high and has 12% upside potential based on the analysts' mean target price of $1.27 for the company. ALU was trading Monday for $1.13, up almost 1% for the day.
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Fundamentally, ALU has several positives. EPS growth for next year is expected to be 67%. ALU is trading for approximately 59% of book value. The company has $2.61 in cash per share. Book value per share is $1.90.
Technically, ALU has been in a well-defined trading range between $1 and $1.20 for the last several months. The stock recently breached resistance at the 50-day sma and is now trading solidly above it. The company has clearly marked a bottom, significantly reducing risk.
Alcatel-Lucent has rallied in recent weeks due to the proliferation in spending by major telecom companies, a major contract win and the prospect it may be about to receive a loan to boost liquidity.
On Friday, a major piece of news was reported in the WSJ regarding the fact an internal European Union analysis has determined that two Chinese makers of wireless network equipment, Huawei Technologies Co. and ZTE Corp., are "inflicting damage on European producers by dumping products onto the European market at rock-bottom prices."
According to the report,
"The European officials are now debating whether to take the next step: an investigation that would risk igniting a trade war with Beijing.
The analysis by the European Commission, the EU's executive arm, finds that Huawei and ZTE are selling equipment for wireless networks at least 35% below what it calls fair market prices."
The risk reward ratio is favorable for longs at this point. ALU is taking the proper steps to return the company to profitability and the prospect of the EU taking action to shore up the competitive market bodes well for the stock. The stock is a buy at this level.
Groupon, Inc. (GRPN)
The company's EPS is expected to grow by 41.18% next year. The company is trading 83% below its 52-week high and has 18% potential upside based on the consensus mean target price of $5.17 for the company. Groupon was trading Monday at $4.32, down nearly 8% for the day.
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Fundamentally, the stock has positives. The stock has a forward P/E ratio of 19.54 and trades for 10.5 times free cash flow. EPS and sales are up substantially quarter over quarter. EPS next year is expected to rise by 41% and by 27% for the next five years.
Technically, the stock was is a well-defined trading range and seemed to find a bottom at the $3 level. Since then stock has rebounded significantly and broke through the first level of resistance at the 20-day sma and 50-day smas which is very bullish.
The stock is down substantially from the IPO price and Tiger Global Investments has taken an active role in turning the company around.
I like the stock here, and the odds of a buyout offer are good at this point. I posit Tiger, Soros and Jones are actively soliciting the company. Even so, never buy a company solely on a potential buyout. What makes Groupon a buy is the solid cash flow and interest in the company by the likes of Tiger and Soros. They are strong shareholder advocates. I like the stock here.
Nokia Corporation (NOK)
The company's EPS is expected to grow by 82.40% next year. The company is trading 33% below its 52-week high and 28% above its consensus mean target price of $2.65 for the company. Nokia was trading Monday for $3.67, down over 5% for the day.
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Fundamentally, Nokia has several positives. Nokia is trading for 1.4 times book value, 36% of sales and has $3.12 in cash per share. EPS next year is expected to rise by 82%. Nokia pays a dividend with a 6.56% yield.
Technically, the stock has rebounded nicely since July and has established an uptrend. The stock broke out massively to the upside recently and is selling off as short -term traders take profits and move on.
Three major pieces of news have come out bolstering my bullish sentiment on the stock. First, Nokia is aggressively pricing product and reportedly the Lumia 920 has sold out in stores.
Secondly, Nokia is seeking to block the sale of most RIM (RIMM) products in the U.S., Canada and U.K. through the enforcement of a recent ruling by an arbitrator. Finally, and most likely the major reason for the recent strength in the stock, Nokia won an important victory in China last week. The company struck a subscription deal with China Mobile. China Mobile is the country's No. 1 carrier with 700 million subscribers and will start shipping Nokia's new flagship phone, the Lumia 920T which runs on Windows Phone 8, in December 2012.
With a dividend yield of nearly 7% Microsoft's backing and the recent contract win in China the risk/reward ratio looks excellent for the stock at this point. The stock is a buy here.
Sirius XM Radio Inc.
The company's EPS is expected to grow by 27.80% over the next five years. The company is trading 7% below its 52-week high, and has 15% upside potential based on the analysts' mean target price of $3.18. Sirius stock was trading for $2.76 Monday, basically flat for the day.
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Fundamentally, this stock has several positives. SIRI has a forward P/E of 27, and trades for 22 times free cash flow. EPS for the next five years is expected to rise by 28%. Quarter-over-quarter sales are up 14%. SIRI's TTM ROE is 87%, and the company's net profit margin is 103%.
Technically, Sirius stock has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is considered extremely bullish. The stock has been hugging the 50-day sma since the start a November.
The big news is Sirius announced Thursday that its Board of Directors has approved a $2 billion common stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions. The Board of Directors also declared a special cash dividend in the amount of $0.05 per share of common stock, payable on December 28, 2012 to stockholders of record as of the close of business on December 18, 2012.
These are events Sirius shareholders have been anticipating for quite some time. This should facilitate the creation of significant shareholder wealth. The future looks bright for Sirius with the recent news regarding new car sales and their budding penetration of that market. I like the stock at this level.
The Bottom Line
The market may experience substantial volatility in the next few weeks as 2012 comes to a close. Headlines regarding the back and forth negotiations regarding the resolution of the fiscal cliff and end of year window dressing may cause the market to sell off prior to year end.
I suggest using these pullbacks as an opportunity to start positions in your favorite stocks on your watch list. I expect the fiscal cliff situation to be resolved and the market to rally in 2013.
Let's not forget, the world's central banks have been taking action and the Bernanke put is firmly in place until 2015. I expect Bernanke and the Fed to underpin their dovish stance over the next few days and announce on Wednesday that it will continue buying Treasury securities to stimulate growth in 2013 which bodes well for stocks.
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.