The stocks covered in this article are all on my watch list and up solidly so far in 2013. On average, these five companies are up by nearly 10%. SUPERVALU Inc. (SVU) is up the most at 15% while Brocade Communications Systems, Inc. (BRCD) is up the least, yet still significant for one week, at approximately 3%.
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.
Now that these stocks have caught our eye, we need to determine if these stocks have significant catalysts going forward. Furthermore, are these stocks in good shape both fundamentally and technically? We need to perform some due diligence to make sure we haven't taken a rose colored view of the situation. Please review the following analysis for an in-depth examination.
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.
Advanced Micro Devices, Inc. (AMD)
The company is trading 68% below its 52-week high and has 3% upside based on the consensus mean target price of $2.75 for the company. AMD was trading Tuesday for $2.69, up 1% for the day.
AMD has some fundamental positives. The company trades for approximately 31% of sales and 1.88 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 88% 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 $2 mark. The stock is currently in accumulation and the 50-day sma has leveled off.
AMD is struggling due to the decline of the PC and has been vastly oversold. The company has been unable to break into the tablet market and its revenues are dropping precipitously. AMD shares have risen and fallen on speculation that the semiconductor company could be headed for a buyout. Qualcomm and Samsung have both been mentioned as potential suitors. This would be a speculative buy, yet I posit the risk/reward equation favors longs at this point.
Brocade Communications Systems, Inc.
Brocade is currently trading at 15% below its 52 week high and has 17% upside potential based on the consensus mean target price of $6.46 for the stock. Brocade was trading Tuesday at $5.41, down almost 2% for the day.
Brocade has some fundamental positives. The company is trading for 1.12 times book value and has a forward PE of $8.33. Brocade is trading for 4.84 times free cash flow. EPS is up tremendously quarter over quarter.
Technically, the stock is still in an uptrend, yet has performed a nearly 50% retracement from the near-term high of $6.50. The stock has been in a well-defined trading range between $4.50 and $6.50 for the past few months. The stock recently broke through resistance at the 200-day sma which is considered bullish.
The company beat last quarter earnings estimates. Fiscal fourth quarter EPS of $0.17 beat by $0.03 and revenue of $578.3M, up 5% year over year, beat by $12 million. The beat was driven by a significant increase in revenue and continued expansion of margins. The stock is a buy here.
Groupon, Inc. (GRPN)
The company is trading 80% below its 52-week high and 2% above the consensus mean target price of $5.17 for the company. Groupon was trading Tuesday at $5.21, down nearly 2% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 21.96 and trades for 12 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 in a well-defined downtrend, yet has found a bottom at $3, leveled off and began trending upward. Since the stock has rebounded 50% and broke through the first level of resistance at the 50-day sma.
The stock is down 85% from the IPO price and has Tiger Global Investments looking over the board's shoulder. I like the stock here, and the odds of a buyout offer are good at this point. I posit Tiger, Soros and Jones aren't in the name for the long haul. They are here to rehab the company's reputation and sell it at a premium.
The company is trading 71% below its 52-week high and has 30% potential upside based on the consensus mean target price of $3.13 for the company. SVU was trading Tuesday at $2.76, down over 3% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 6.33 and trades for 7.7 times free cash flow. The company is trading for 2% of sales according to Finviz.com.
Technically, the stock just broke out of a well-defined downtrend and started trending higher after seeming to find a bottom at the $2 level.
The stock spiked in late October when it announced it has been in talks with several different parties over potential deals. I have taken a position in the stock. I like the technical and fundamental state of the stock. Cerberus Capital Management LP and SVU are close to a deal where Cerberus would buy some parts of the grocer and take a stake in the rest of the company, according to the rumor mill. Supervalu is set to disclose its quarterly financial results on Thursday. I suspect any news regarding the deal may be disclosed at that time.
Xerox Corp. (XRX)
The company is trading 19% below its 52-week high and has 7% upside potential based on the consensus mean target price of $7.50 for the company. Xerox was trading Tuesday for $7.15, down over 1% for the day.
Fundamentally, Xerox is solid. The company has a forward P/E of 6.46. The company is trading for 73% of book value and has a PEG ratio of 2. Xerox's EPS growth rate was over 100% this year. Xerox is trading for 7 times free cash flow. The company pays a dividend with a yield of 2.35%.
Technically, the stock looks like it may have put in a bottom. The stock has been on a roll since the company's annual conference on November 13th. The stock has posted higher highs and higher lows since that date.
Xerox predicted its services business will expand to two-thirds of revenue by 2017 from about half this year, mitigating waning demand for paper documents, and announced a dividend increase in 2013. Chief Executive Officer Ursula Burns stated,
"We'll be able to have a low-growth business shifting to a high-growth business as we get more of our revenue from services. On balance, we're making progress, not fast enough. I'm not patient."
Xerox is trying to transform itself from a printer sales company to a service company where the margins are much higher. I believe Xerox has the wherewithal to pull off the turnaround. The risk reward is favorable for long trades at this level.
The Bottom Line
The risk/reward ratio for these stocks looks favorable for long trades at the time. We are talking about investing in these stocks for the long haul. If you attempt to trade stocks in this volatile market you will surely get yourself into trouble.
Use the sell offs like Wednesday's to layer into your favorite stocks at a discount. 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.
Disclosure: I am long SVU.
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.