The stocks covered in this article are technology stocks with market caps of $3 billion or greater that could be undervalued based on fundamentals. All are trading for approximately book value. Nokia Corporation (NOK) has the highest price to book ratio at 1.47 while Xerox Corp. (XRX) has the lowest at .84. These facts alone carry little weight, but it's a good starting point when looking for undervalued stocks with the potential for creating alpha.
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. Nevertheless, let's not get carried away just yet. We need to perform some due diligence to make sure these dogs can hunt. Please review the following breakdown of each stock for an in-depth analysis of the upside potential.
In the following sections, we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any potential catalysts exist based on sector, industry or company specific events. The following table depicts summary statistics and Wednesday's performance for the stocks.
Alcatel-Lucent, S.A. (ALU)
The company is trading 41% below its 52-week high and is currently trading 9% above the analysts' mean target price of $1.45 for the company. ALU was trading Wednesday for $1.56, down over 8% for the day.
Fundamentally, ALU has several positives. The company's EPS is expected to grow by 272% this year and 42% next year. ALU is trading for approximately 87% of book value. The company has $2.72 in cash per share. Book value per share is $1.96.
Technically, ALU has broken below support at the 20-day sma level on Wednesday. The stock floundered around the $1 mark for several months prior to breaking out in mid-December. The stock recently achieved the coveted golden cross which is very bullish.
The proliferation in spending by major telecom companies, a major contract win and receiving a loan to boost liquidity are the major catalysts propelling ALU shares higher. The stock has breached major support, yet at the same time is fulfilling the golden cross. I say let it come in further and buy once the stock starts to consolidate.
Micron Technology Inc. (MU)
The company is trading 17% below its 52-week high and 18% potential upside based on the consensus mean target price of $9.06 for the company. Micron was trading Wednesday for $7.65, up almost 1% for the day.
Fundamentally, Micron has some positives. Micron's forward P/E is 15.30. Micron is expecting EPS to be up 193% next year. Micron is trading for slightly over book value and under one times sales. Micron insider ownership has increased by 45% over the past six months.
Technically, Micron is in an uptrend. The stock reversed trends at the beginning of November. The stock broke through major resistance at the 50-day and 200-day SMAs and kept on going. Recently, the stock achieved the golden cross which has been a very valuable buy indicator for me. The recent pullback is healthy for the stock.
Micron should benefit from a more favorable supply/demand balance due to changes in the market. I believe the risk/reward is favorable for the longs here. With the stock achieving the golden cross recently, I see the pullback as a buying opportunity.
The company is trading 25% below its 52-week high and 22% above its consensus mean target price of $3.17 for the company. Nokia was trading Wednesday for $4.09, down almost 3% for the day.
Fundamentally, Nokia has several positives. Nokia is trading for 1.43 times book value, 39% of sales and has $3.63 in cash per share. EPS next year is expected to rise by 425%, according to Finviz.com.
Technically, the stock has rebounded nicely since July and has established an uptrend. The stock broke out massively to the upside recently as it fulfilled the golden cross where the 50-day SMA crosses above the 200-day SMA. The stock is technically solid here, yet has gapped down after earnings. Read transcript here.
Despite net earnings of 202 million euros, the company's first profit in six straight quarters, sales of 8.04 billion euros missed expectations of 8.12 billion. Furthermore, the company suspended its dividend.
With Microsoft's backing and the recent contract win in China the risk/reward ratio still looks excellent for the stock at this point. In my last article I suggested waiting for a pullback to the midpoint of the uptrend channel prior to starting a position. That has now occurred. I like the stock here, but to reduce risk wait and see if the 50-day sma support level holds.
MetroPCS Communications, Inc. (PCS)
The company is trading 32% below its 52 week high and 21% below the analysts' consensus mean target price of $11.98 for the company. MetroPCS was trading Wednesday at $9.90, up over 1% for the day.
MetroPCS has several fundamental positives. The company is trading for slightly above book value, has a PEG ratio of .45 and has a forward PE of $13.20. MetroPCS is trading for 10.07 times free cash flow. MetroPCS has an EPS growth rate of over 50% for this year and 14.41% for next five years.
The stock looks poised to break out. It is bouncing off the bottom of the long-term uptrend line. The golden cross has been achieved which is positive, yet the stock is current at the apex of a descending triangle pattern.
MetroPCS is a Texas-based company with strategically placed spectrum licenses. The company is set up for massive expansion. MetroPCS stock offers a compelling buying opportunity at this price. If you bought the stock based on my initial recommendation on May 22nd you would be up significantly. The stock is showing strong relative strength compared to other telecom names. I still like the stock here.
The company is trading 3% below its 52-week high and has 3% upside potential based on the consensus mean target price of $7.92 for the company. Xerox was trading Wednesday for $8.16, up slightly for the day.
Fundamentally, Xerox is solid. The company has a forward P/E of 6.86. The company is trading for 84% of book value and has a PEG ratio of 1.73. Xerox's EPS growth rate was over 100% this year. Xerox is trading for 5.5 times free cash flow. The company pays a dividend with a yield of 2.08%.
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. The golden cross looks imminent.
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. I believe Xerox has the wherewithal to pull off the turnaround. The risk reward is favorable for long trades at this level. Wait for a pullback and the golden cross to start a position though.
The Bottom Line
The risk/reward ratio for these undervalued 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 any sell off to layer in to 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.
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.