With the markets trading at all-time highs and the possibility of sequestration looming, it appears the market may be heading for a correction. Markets do not go up in a straight line. Market corrections create opportunities to buy stock in solid companies with sound prospects at a discount. Hopefully you have kept some powder dry and can take advantage. The market is clearly at an inflection point. A market correction provides opportunity to buy great names at a discount price. I have selected five stocks I posit have significant upside going forward. Furthermore, these stocks are considered blue chips. A blue chip is a stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad.
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 start a position. The following table depicts summary statistics and Thursday's performance for the stocks.
Bank of America Corporation (BAC)
The company is trading 8% below its 52-week high and has 8% potential upside based on a consensus mean target price of $12.39 for the company. BAC was trading Thursday at $11.544, down almost 1% for the day.
Fundamentally, BAC has several positives. The company has a forward P/E of 9.22. 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 31% and the company pays a dividend with a yield of .34%.
Technically, BAC is in a solid uptrend. 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 just below the 50-day sma. Look for the stock to bounce back above the 50 day for confirmation of support prior to starting a position.
Bank of America has a fortress balance sheet. BAC's success at cutting costs, improved capital position and the likelihood of higher capital returns are all huge positives going forward. 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. The stock is a solid buy at this level if you have a long-term time horizon.
Citigroup, Inc. (C)
The company is trading 5% below its 52-week high and has 16% upside potential based on the analysts' mean target price of $49.08 for the company. Citigroup was trading Thursday for $42.33, down 2% for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 8.33. Citigroup is trading for 69% of book value. The company has a PEG ratio of 1.39 and a net profit margin of 11.27%.
Technically, the stock had a recent downturn which coincided with the recent election. Even so, the golden cross was recently achieved at the beginning of October. This is a bullish indicator that has served me well. Recently the stock pulled back slightly, yet is still in a solid uptrend. Wait for the stock to test the 50-day sma support level prior to starting a position.
Citigroup should benefit greatly from an upturn in global growth and the US housing market. The upcoming Fed stress test should be a near-term catalyst for bank stocks. Citigroup is a buy at this level.
Ford Motor Co. (F)
The company is trading 13% below its 52-week high and has 22% upside based on the analysts' mean target price of $15.14 for the company. Ford was trading Thursday for $12.39, down almost 2% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 7.50. Ford is trading for 12 times free cash flow and 2.5 times book value. EPS next year is expected to rise by approximately 20%. The company pays a dividend with a yield of 3.17% and has a PEG ratio of 0.27 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 the last quarter. The stock achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma. Nevertheless, the stock has broken through support at the 50-day sma. Look for support to hold up at the bottom of the current uptrend channel at $12. If it holds this level I would buy it.
The probabilities of a rebound in the US housing market coupled with the fact that the average age of cars on the road is 11 years should provide a significant catalyst for the stock. The stock is a buy at this level, yet wait for confirmation of support prior to starting a position to reduce risk.
Cisco Systems, Inc. (CSCO)
The company is trading 4% below its 52 week high and has 11% potential upside based on the consensus mean target price of $23.20 for the company. Cisco was trading Thursday at $20.76, down almost 2% for the day.
Fundamentally, CSCO looks solid. Cisco has a forward P/E of 10. Cisco's quarter over quarter EPS and sales growth rates are 46% and 5%, respectively. Cisco's net profit margin is 19.72%. Cisco has a dividend with a yield of 2.65%. The company is trading at 13 times free cash flow.
Technically, Cisco is has been performing well since bouncing off a low of 15 in late July. The stock has posted higher highs and higher lows since that time. The coveted golden cross has been achieved. The stock has broken out above the resistance at the top of the uptrend channel.
The proliferation of smartphones and other mobile devices should be a major profit driver for the company. I posit the need for network improvements as the growth of people transacting on their mobile devices will soon reach a tipping point and Cisco will be there to provide solutions. The tide has turned for Cisco. Chambers keeps guidance low so the stock should have a slow and steady rise with reduced risk. Cisco is a long-term buy.
General Electric Company (GE)
The company is trading 2% below its 52 week high and has 7% potential upside based on the consensus mean target price of $25 for the company. GE was trading Thursday at $23.26, down almost 1% for the day.
Fundamentally, GE looks solid. GE's forward P/E is 12.64. 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 3.27%.
Technically, GE has been in an uptrend since bouncing off a low of $18 in June. Recently, the stock has broken out to the upside after testing the 200-day sma twice in the last quarter.
GE looks poised to take advantage of an upturn in growth in the emerging markets. If global growth does improve, GE will definitely grow along with it. The stock gapped up recently. I would wait for a pullback to $22.75 filling the gap prior to starting a position.
The Bottom Line
I posit these stocks present excellent buying opportunities. The potential upside is notable as the markets find a bottom and gain their footing. Markets incessantly gyrate, the only constant is the fact that they always go up over the long haul.
These are long-term investments. If you try to trade the market during these volatile times, you will most certainly get crushed. The risk reward ratio for a long position in these stocks is currently favorable. There will be more volatility in the market going forward though. Remember, we are sitting at five year highs.
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. Furthermore, always be sure to have a well-balanced highly diversified portfolio to reduce risk.
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 is 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.