I posit the stocks covered in this article are well positioned for near-term upside based on macroeconomic, sector or company specific catalysts coupled with fundamental buying opportunities. However, many are trading at significant discounts due to a lack of confidence from investors that their picture will improve significantly. Most are trading substantially below their all-time highs.
The market is currently trading at multi-year highs. Many are calling for a short-term pullback. I say ignore the short-term noise. If you ignore the noise, do your due diligence, have a long-term time horizon and courage in your convictions, you can be successful. I have selected five stocks to review that have the strong potential for solid gains over the coming years. I think they are worth a look.
In the following sections, we will perform a review of the fundamental and technical state of each company followed by an analysis of the underlying catalysts and downside risks for the stocks. The following table depicts summary statistics and Monday's performance for the stocks. The following charts are provided by Finviz.com.
Alcatel-Lucent, S.A. (ALU)
The company is trading 40% below its 52-week high and is currently trading 18% above the analysts' mean target price of $1.35 for the company. ALU was trading Monday for $1.65, down nearly 1% for the day.
Fundamentally, ALU has some positives. The company's EPS is expected to grow by 272% this year and 123% next year. ALU is trading for approximately 84% of book value. The company has $2.70 in cash per share. Book value per share is $1.97.
Technically, ALU has broken below support at the 20-day sma level. 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 stock recently pulled back after missing earnings and the announcement that the CEO is stepping down.
The proliferation in spending by major telecom companies, a major contract win and receiving a loan to boost liquidity are the major catalysts that propelled ALU shares higher recently. 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 bounces off the 50-day sma. Alcatel-Lucent is a speculative buy with the potential for a high reward, yet a high risk as well.
Bank of America Corporation (BAC)
The company is trading 3% below its 52-week high and has 3% potential upside based on a consensus mean target price of $12.18 for the company. BAC was trading Monday at $11.86, up almost 1% for the day.
Fundamentally, BAC has several positives. The company has a forward P/E of 9.12. BAC has a net profit margin of 5.03%. BAC is trading for approximately 54% of book value. EPS next year is expected to rise by 30% and the company pays a dividend with a yield of .34%.
Technically, BAC looks good. The coveted golden cross was fulfilled earlier this year. The stock has been in a solid uptrend since mid-July. The stock recently pulled back to the midpoint of the uptrend channel. The stock has a beta of 2.40, which means it is extremely volatile as compared to the markets in general.
Global money center banks like BAC are the source of funding for global growth. The uptick in the housing market and the steepening of the yield curve due to demand for long-term capital are strong buy indicators for the banks.
BAC has a fortress balance sheet. The Fed's stress test results are due out in the next few weeks. BAC's success at cutting costs and improved capital position should bode well for the stock. I posit BAC will announce a share buyback program and increased dividends. The stock is a buy here. I am long now.
Nokia Corporation (NOK)
The company is trading 24% below its 52-week high and 11% above its consensus mean target price of $3.69 for the company. Nokia was trading Monday for $4.15, up almost 2% for the day.
Fundamentally, Nokia has several positives. Nokia is trading for 1.42 times book value, 40% of sales and has $3.60 in cash per share. EPS next year is expected to rise by 114%.
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 missing 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 to reduce risk wait and see if the 50-day sma support level holds. With the stock bouncing off the 50-day sma, now is the time to start a position.
Sirius XM Radio Inc. (SIRI)
The company is trading 3% off its 52-week high and has 8% upside potential based on the analysts' mean target price of $3.40. Sirius stock was trading Monday for $3.14, up nearly 1% for the day.
Fundamentally, this stock has several positives. SIRI has a forward P/E of 24, and trades for 29 times free cash flow. EPS for the next five years is expected to rise by 32%. Quarter-over-quarter sales are up 14% and EPS is up 128%. SIRI's TTM ROE is 98%, 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 achieved by the stock in August. This extremely bullish signal has once again been proven true. The stock has been posting higher highs and higher lows since the start of December.
The big news is Sirius' Board of Directors has approved a $2 billion common stock repurchase program. This should underpin the stock at this level. Secondly, new car sales are up significantly and SIRI is a derivative play on the auto industry. SIRI is well positioned for organic growth and actually added two million new subscribers last year. The recent positive news regarding new car sales and a share buyback program bodes well for the stock.
Moreover, SIRI fourth quarter earnings more than doubled benefiting from continued subscriber growth and lower churn rates. The company reported a profit of $156.2 million, up from $71.3 million a year earlier. You can read the earnings call transcript here. With the stock trading near the bottom of the uptrend channel, now is the time to start a position.
MEMC Electronic Materials Inc. (WFR)
The company is trading 70% below its 52-week high and on par with the consensus mean target price of $4.52 for the company. WFR was trading Monday for $4.48, flat for the day.
Fundamentally, WFR has some positives. The company has a forward P/E of 23. The company is trading for 1.76 times book value and 39% of sales. WFR's EPS is up 139% quarter-over-quarter.
Technically, the stock looks like it may have put in a bottom at the $2 mark. The stock has been on a roll and is in a solid uptrend. All major moving averages are now trending upward and the golden cross has been achieved. Nevertheless, the stock is showing signs of being overbought with an RSI of 70.38.
WFR is on the comeback trail. With the potential for a pick-up in global growth on the horizon, I see WFR moving even higher. Nonetheless, I would not get in prior to earnings on February 13. The stock has had quite a run; it may be a sell the news event. This will offer an excellent buying opportunity.
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. I suggest you take your time and layer into any new positions.
There may be more buying opportunities ahead for these stocks as politicians navigate the many hurdles they will face in the near future. Take your time building a position. One of the major factors affecting your potential return in a stock is your cost basis.
Disclosure: I am long BAC.
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.