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"An optimist will tell you the glass is half-full; the pessimist, half-empty; and the engineer will tell you the glass is twice the size it needs to be"-- Anonymous

One of the truisms that I have found works consistently in most aspects in life is reversion to the mean. This is true in sports where two teams that struggled in 2011, Seattle and Indianapolis, are 10 win playoff teams in 2012 while the defending Super Bowl champions Giants will not make the playoffs this year. This also is true in investing. Some of the best performers in 2012 within the S&P were some of the worst performers in 2011. This was recently covered in Barron's which pointed out a good portion of the outperformance the following year occurred in January.

With that in mind, here are three cheap stocks that have had a lousy fourth quarter underperforming the S&P by double digits but look like they have brighter futures ahead early in 2013.

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Freeport-McMoRan Copper & Gold (NYSE:FCX) is one of the largest copper & gold miners in the world. Thanks to new acquisitions, approximately 25% of revenues will now come from energy sector as well.

Underperformance against S&P over past 13 weeks - 13.99%

Key reason to be optimistic - China, the core source of demand on the margin for copper & iron as well as other commodities, looks like it is over an economic rough patch in front of a once a decade political transition.

4 reasons FCX is undervalued at just under $34 a share:

  1. FCX yields 3.7%. It also has paid a couple of special dividends over the past few years.
  2. The stock is selling near the bottom of its five year valuation ranged based on P/S, P/CF and P/B.
  3. The mean price target held by the 15 analysts that cover the stock is just under $42 a share.
  4. Freeport is cheap at just over 7 times forward earnings, a discount to its five year average (12.8).

Apple (NASDAQ:AAPL) is the world's most valuable company by market capitalization.

Underperformance against S&P over past 13 weeks - 21.53%

Key reason to be optimistic - Apple has sold off some 190 points since its peak in Mid-September. There is a good reason to believe a decent portion of this has been due to capital gains related selling to avoid the higher tax rates in 2013 and quarterly window dressing as losses mounted.

4 key reasons Apple is cheap at around $510 a share:

  1. The stock is more than 40% below the median price target of $750 a share held by the 48 analysts that cover the stock
  2. The company has over $120B in cash and short term marketable securities on the books. AAPL also pays 2.1% dividend yield.
  3. The stock sells at the bottom of its five year valuation range based on P/E, P/CF and P/B.
  4. Despite growing earnings at approximately 50% annually over the last five years, AAPL is selling at less than 9x forward earnings.

Swift Energy Company (NYSE:SFY) develops and produces oil and natural gas from its properties in Texas, as well as onshore and in the inland waters of Louisiana. It has approximately 160mm barrels of oil equivalent on the books.

Underperformance against S&P over past 13 weeks - 25.87%

Key reason to be optimistic - After falling for months, consensus earnings estimates for both FY2012 and FY2013 have stabilized over the last month. In addition, revenue is projected to rise 20% in FY2013 after declining some 7% in FY2012.

4 reasons SFY is a bargain at $15 a share:

  1. The twelve analysts that cover the stock have a median price target of $27.50 a share, some 80% above the current stock price.
  2. The stock is cheap at 64% of book value and its market capitalization is just two times its operating cash flow.
  3. SFY sells at less than 11x forward earnings, a discount to its five year average (18.9).
  4. The stock is selling at the bottom of its five year valuation range based on P/S, P/CF and P/B. The stock also looks like it has established some medium term technical support at these levels (See Chart).

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Source: 3 Ugly Ducklings That Could Turn Into Swans Early In 2013