I posit we are on the cusp of a major bull market run. The next few years should be an amazing time to be in the equities markets. Nonetheless, we may experience a short term pullback based on the fact the markets have run up very quickly since the start of the year. The U.S. equity markets soared after Congress struck a fiscal cliff deal at the beginning of the year. The Dow hasn't seen a January this good since 1989. The index is just a few percentage points away from its all-time high. The S&P 500 had its best January since 1997 and is also close to achieving a comparable landmark. Even so, many investors are waiting to leap in on weakness. I see any pullback being extremely shallow and an excellent buying opportunity.
A substantial amount of cash has flowed into stock mutual funds recently. Over the last few weeks approximately $20 billion has flowed in. Nevertheless, this is a mere drop in the bucket with $400 billion in outflows over the last four years. With the high probability of more money coming off the sidelines, the markets should continue higher.
I have chosen five stocks with substantial catalysts for growth I believe will lead the markets higher over the next few years. In the following sections we will perform a review of the fundamental and technical state of each company to determine if this is the right time to buy. Furthermore, we will attempt to identify potential catalysts for growth. The following table depicts summary statistics and Tuesday's performance for the stocks.
Ford Motor Co. (F)
The company is trading 8% below its 52-week high and has 16% upside based on the analysts' mean target price of $15.14 for the company. Ford was trading Tuesday for $13.04, down almost 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 7.79. Ford is trading for 12.53 times free cash flow and 2.6 times book value. EPS is up nearly 200% this year and is expected to rise by approximately 20% next year. The company pays a dividend with a yield of 3.06% and has a PEG ratio of 0.28 and a net profit margin of 13.36%.
Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since last quarter. The stock achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma in December of last year. This is a significant event and should drive the stock higher as many technical traders use this as a bullish signal to buy. Currently, the stock has pulled back to just above the 50-day sma.
Bank of America put out a note recently stating the U.S. automobile sector could be set for solid growth even after achieving a 13.4% gain in sales last year. Analysts tout the demand issue of an aging U.S. fleet in making their bullish call. The firm notes consumer buying of new cars to replace older vehicles should stay strong until 2018.
The rebound in the US housing market coupled with the aging of cars on the road should provide a significant catalyst for the stock. In my last update on the stock I recommended waiting until after earnings to start a position due to the probability of a pullback. The pullback has happened, and I like Ford here.
General Electric Company (GE)
The company is trading 2% above its former 52 week high and has 7% potential upside based on the consensus mean target price of $24.86 for the company. GE was trading Tuesday at $23.29, up over 3% for the day.
Fundamentally, GE looks solid. GE's forward P/E is 12.27. GE's quarter over quarter EPS and sales growth rates are 10% and 4%, respectively. GE's net profit margin is 10.11%. GE has a dividend with a yield of 3.37%.
Technically, GE is has been in an uptrend since bouncing off a low of $18 in June. Recently, the stock has broken out to the upside of a descending triangle formation. This is extremely bullish, yet the stock has gapped up recently and the RSI is over 70 currently. This would suggest the stock is overbought at this level.
Four major catalysts should propel the stock higher from here. First, Citigroup (C) recently put out a report anticipating the U.S. would be energy independent by 2020, effectively capping the upside for crude oil at current levels. Citigroup thinks GE stands to gain greatly by the reduced cost of energy going forward. Second, the company is cleaning up its balance sheet ridding itself of non-core assets. The company sold the remaining 49% stake it holds in NBC Universal to Comcast (CMCSA) for $16.7B. GE expects a pre-tax gain from the sale of approximately $1 billion. Third, the company is returning wealth to shareholders. The company raised its authorized stock buyback to $35B and plans to buy back $10B worth of shares in 2013. Finally, GE looks poised to take advantage of an upturn in growth in emerging markets. If global growth does improve, GE will definitely grow along with it. The stock has gapped up so suddenly, I would wait for a pullback prior to starting a position, but you may not get that chance.
Groupon, Inc. (GRPN)
The company is trading 73% below its 52-week high and 5% above the consensus mean target price of $5.33 for the company. Groupon was trading Tuesday at $5.60, up nearly 6% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 22 and trades for 12 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 then 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 soon.
Groupon is up big today after an upgrade to Buy at Sterne Agee with a $9 price target. Sterne's Arvind Bhatia says,
"We have greater conviction in the company's ability to evolve beyond its current business."
Yet Bhatia emphasizes this is a long-term call with a twelve month price target of $9, not a call on the quarter.
The stock is down 73% 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. Even so, I am changing my stance on the stock based on the fact it has run up so quickly prior to earnings. There is a possibility management may kitchen sink the quarter in order to reset expectations going forward. I would hold off on starting a position until after earnings are announced on February 27th. Nevertheless, the stock is a strong buy long-term.
SandRidge Energy, Inc. (SD)
The company is trading 35% below its 52-week high and has 24% upside based on the consensus mean target price of $7.23 for the company. SandRidge was trading Tuesday for $5.83, up nearly 4% for the day.
Fundamentally, SandRidge has a few positives. SandRidge is trading for slightly over book value. SandRidge has a net profit margin of 8.57%. Quarter-over-quarter sales are up 46%. Insider ownership is up over 40% in the last six months.
Technically, the stock had been on a nice little run since the start of November. Then the stock took a huge nose dive at the beginning of February. The stock just bounced off of long-term support at the $5.50 level.
The reason for the pop on Tuesday was a report on Leon Cooperman's Omega Advisors fund 13f filing which disclosed a new 24.4 million share position in SandRidge. I see the current sell off as a buying opportunity. The issues will be resolved and the company will snap back with time. SandRidge is in the process of rebalancing its production efforts to focus on liquids which are much more profitable.
A plan to remove the company's leadership being promoted by investment group TPG-Axon Capital may or may not prevail. Nevertheless, I posit the spotlight placed on management by the move will cause positive results regardless of what happens now. The stock is a buy here.
Xerox Corp. (XRX)
The company is trading 5% below its 52-week high and has 2% upside potential based on the consensus mean target price of $8.14 for the company. Xerox was trading Tuesday for $7.99, up slightly for the day.
Fundamentally, Xerox is solid. The company has a forward P/E of 6.69. The company is trading for 82% of book value and has a PEG ratio of 1.89. Xerox is trading for 5.3 times free cash flow. The company pays a dividend with a yield of 2.14%.
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 has occurred. The stock is consolidating just above long-term support at the $8 mark.
Xerox just announced a groundbreaking product that allows its devices to be used in the cloud securely. Tuesday, Xerox introduced ConnectKey, a software system embedded in Xerox multifunction printers and a set of solutions that respond to the needs of an increasingly mobile workforce and the need for more advanced IT security across connected devices.
Furthermore, Xerox predicted its services business will expand to two-thirds of revenue by 2017 from about half this year. This should lead to significantly higher margins. The risk reward is favorable for long trades at this level. In my last update I suggested waiting for a pullback and for the golden cross to be achieved prior to starting a position. Well, here you go. They both have occurred. Now is an ideal time to start a position in the stock.
The Bottom Line
The risk/reward ratio for these stocks looks favorable for long trades at this 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. Nevertheless, the market looks primed for a major bull market run.
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 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.