The stocks covered in this article are technology stocks with market caps of $2 billion or greater that have solid upside potential in 2013. Furthermore, all are trading for significantly less than their all-time highs. These facts alone carry little weight, but it's a good starting point when looking for buying opportunities 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.
Frontier Communications Corporation (FTR)
The company is trading 11% below its 52-week high and has 10% upside potential based on the consensus mean target price of $4.93 for the company. Frontier was trading Wednesday for $4.50, down slightly for the day.
Frontier has some fundamental positives. Frontier pays a dividend with a yield of 8.83%. The company is trading for slightly over book value, 89% of sales and has a forward P/E of $18.12. The company's gross margin is 91.03%. The stock is trading for 19 times free cash flow.
Technically, Frontier has been in an uptrend since May. The golden cross was achieved at the beginning of September. This is a very bullish development. The stock tested the bottom of the current uptrend channel for the second time in late December and has been trending upward since. The stock has been consolidating at the current level for quite some time.
Frontier announced earnings that met top and bottom line estimates last quarter. Additionally, Frontier's 2012 free cash flow guidance was unchanged at $900M-$1B.
The stock looks like a buying opportunity going into earnings on February 21st. The 9% dividend provides some insurance. Furthermore, the telecom sector is on fire. The stock has a high short interest. This can either be seen as a negative or a positive depending on your point of view. Nonetheless, I like the stock here, Frontier is currently trading at decade lows and a high short interest provides the opportunity for a significant short squeeze.
Groupon, Inc. (GRPN)
The company is trading 80% below its 52-week high and 35 above the consensus mean target price of $5.22 for the company. Groupon was trading Wednesday at $5.36, up nearly 5% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 21.33 and trades for 11 times free cash flow. EPS and sales are up 95% and 32% respectively 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 and broke through the first level of resistance at the 50-day sma. The 50-day sma has turned upward and I can see the golden cross potentially coming into play as time goes on.
The stock is down 85% from the IPO price and has Tiger Global Investments looking over the board's shoulder. They are in the process of cleaning Groupon up and getting it back on track in order to create shareholder wealth. I like the stock here. The odds of a pop after earnings are announced on February 27th seem favorable. They have had time to straighten the company out and should give positive guidance.
Micron Technology Inc. (MU)
The company is trading 14% below its 52-week high and 17% potential upside based on the consensus mean target price of $9.21 for the company. Micron was trading Wednesday for $7.93, up almost 1% for the day.
Fundamentally, Micron has some positives. Micron's forward P/E is 15.43. Micron is expecting EPS to be up 194% next year. Micron is trading for slightly over book value and under one times sales. Micron insider ownership has increased by 44% 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.
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 further upside.
LSI Corporation (LSI)
The company is trading 21% below its 52 week high and has 18% potential upside based on the analysts' consensus mean target price of $8.41 for the company. LSI was trading Wednesday for $7.29, up almost 1% for the day.
LSI has several fundamental positives. The stock has a projected EPS growth rate for next five years of 13%. LSI is trading for 16 times free cash flow. LSI has a rock-solid balance sheet with a significant percentage of market cap in cash. LSI has a PEG ratio of 1.59. The forward P/E ratio is 10.03
Technically, the stock is at the apex of a descending triangle. This is known as the break out position. The stock has been in a short-term uptrend since November and broken through the 200-day sma. The stock just achieved the golden cross where the 50-day sma crosses above the 200-day sma.
I like the stock here. There is growing optimism that 2013 will be a big year for telecom capital expenditures. Furthermore, the stock just achieved the golden cross. This bullish indicator bodes well for the stock.
Zynga, Inc. (NASDAQ:ZNGA)
The company is trading 81% below its 52-week high, and has 19% potential upside based on the analysts' mean target price of $3.52. ZNGA was trading Wednesday for $2.99, up almost 10% for the day.
Fundamentally, ZNGA has a few positives. EPS is expected to grow by 21% over the next five years. The stock is trading for 1.16 times book value, and has $1.69 in cash per share.
Technically, the stock seems to have found a bottom at this level. The stock has been trading sideways since late July. Nevertheless, the trend is positive.
Social media stocks are currently still in their infancy. I have been negative on the stock until now. The recent earnings beat bodes well for the stock. You can read the transcript here. The company seems to be turning the corner. I posit the risk/reward ratio favors the longs at the point. I would wait for the stock to cool off some prior to starting a position though.
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 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 to reduce risk. Set a 5% trailing stop loss to minimize losses even further if you wish.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRPN, LSI, ZNGA, MU, FTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.