These five stocks have catalyst for growth in 2013 and are still trading for close to book value. Xerox Corp. (XRX) is the most undervalued trading at 85% of book value while Alcatel-Lucent, S.A. (ALU) is the least trading at 1.3 times book. See chart below.
These facts alone carry little weight, but it's a good starting point when looking for buying opportunities.
Additionally, the five stocks are trading at or below $10. Stocks trading for $10 or less tend to be more volatile with frequent, large percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks with market caps of $3 billion or greater. Stocks trading under $10 may provide more bang for your buck.
Finally, the companies have had some very positive developments occur recently. Now, simply selecting stocks trading for less than $10 and near book value is only the first step to finding winners that may provide alpha. We still need to perform further due diligence to determine if these dogs can hunt. Furthermore, we will review the technical state for each company to determine if this is an ideal time to start a position.
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. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Wednesday's performance for the stocks.
The company is trading 43% below its 52-week high and is trading on par with the analysts' mean target price of $1.39 for the company. ALU was trading Wednesday for $1.41, down nearly 3% for the day.
Fundamentally, ALU has several positives. The company's EPS is expected to grow by 108% next year. ALU is trading for just a slight premium to book value. The company has $2.75 in cash per share. Book value per share is $1.11. Furthermore, the balance sheet and cash flow situation has been addressed.
Technically, ALU has given back all its gains from the start of the year. The stock has broken through support at the 20-day and 50-day sma. The stock recently successfully tested major support at the 200-day sma and is now trading at 6% above it.
ALU is taking the proper steps to return the company to profitability and the prospect of the EU taking action to shore up the competitive market bodes well for the stock. Moreover, ALU and China Mobile (CHL) unveiled an innovative new member of the "lightRadio" family that will help accelerate deployment of 4G TD-LTE technology across China. China is the largest and fastest growing mobile market in the world as it continues to meet fast rising customer demand for mobile video and data. This is a huge development for ALU.
In my previous missive I suggested waiting until the stock successfully tested the 200-day sma prior to starting a position to reduce risk. This event has occurred. I like the stock here, yet be sure to scale into the position to reduce risk.
Micron Technology Inc. (MU)
The company is trading 3% below its 52-week high and 7% potential upside based on the consensus mean target price of $9.32 for the company. Micron was trading Wednesday for $8.72, flat for the day.
Fundamentally, Micron has some positives. Micron's forward P/E is 16.47. Micron is expecting EPS to be up 198% next year according to Finviz.com. Micron is trading for a slight premium to book value and sales. Micron insider ownership has increased by 42% 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. The golden cross was achieved in early January.
PC DRAM prices have continued to soar in the face of weak OEM demand. Digitimes recently reported spot prices rose an additional five percent thanks to ongoing production shifts. Furthermore, industry consolidation has left Samsung (OTC:SSNLF), Micron (MU +3.5%) and SK Hynix controlling 90% of the 2013 market which should underpin pricing. Micron should benefit from this more favorable supply/demand balance. I believe the risk/reward is favorable for the longs here with the stock trading close to book. As always, scale into the position. This one has run quite a bit recently.
Nokia Corporation (NOK)
The company is trading 30% below its 52-week high and has 4% upside based on its consensus mean target price of $3.73 for the company. Nokia was trading Wednesday for $3.59, up almost 2% for the day.
Fundamentally, Nokia has several positives. Nokia is trading for 1.26 times book value, 35% of sales and has $3.51 in cash per share. EPS next year is expected to rise by 114% and is up over 100% quarter over quarter.
Technically, the stock had an amazing run from November 2012 until mid-January 2013 before taking a deep plunge. The stock seems to have found support at the $3.50 mark.
Nokia's Lumia 720 and 520 were officially unveiled recently. The 720 features a 4.3" display and a 6.7MP camera. The 520 sells for $183 (helpful in emerging markets), and has a 4" display and 5MP camera. Both devices use dual-core Qualcomm (QCOM) Snapdragon processors. This news bodes well for Nokia's stock. Along with the Lumia 720 and 520, Nokia has launched two other new feature phones, the 105 and 301. The 105 costs a mere $20, but its color display is a step up from the monochrome screen of its predecessor. The 305 costs $85, and has a 2.4" display and 3.2MP camera.
With Microsoft's backing, the launch of new low end phones and the recent contract win in China the risk/reward ratio in the stock seems favorable at this point. With the stock bouncing off the $3.50 mark, this looks like a buying opportunity to me. I like the stock here.
SandRidge Energy, Inc. (SD)
The company is trading 33% below its 52-week high and has 21% upside based on the consensus mean target price of $6.97 for the company. SandRidge was trading Wednesday for $5.72, up over 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 9.03%. Quarter-over-quarter sales and EPS are up 258% and 35% respectively. Insider ownership is up over 44% in the last six months.
Technically, the stock has fulfilled a double bottom reversal pattern, which is very bullish technically. The stock is trading close to 52-week lows.
TPG-Axon recently announced it increased its stake in SandRidge to 36.2 million shares from 33 million at 2012's end. Between TPG and Leon Cooperman, another activist investor who disclosed a 5.5% stake in the company Wednesday, that's more than 70 million shares versus a float of 500 million. A plan to remove the company's leadership being promoted by investment group TPG-Axon Capital is in the works as well. Regardless of the outcome, I posit the spotlight placed on management by the move will bring positive developments. Furthermore, based on many rigs being laid down as leasehold drilling abates, I posit their cost of doing business in certain plays will decrease significantly. Cooperman believes the stock is trading for half its intrinsic value. I am long SandRidge.
The company is trading at its 52-week high and slightly above the consensus mean target price of $8.14 for the company. Xerox was trading Wednesday for $8.34, up over 1% for the day.
Fundamentally, Xerox is solid. The company has a forward P/E of 6.91. The company is trading for 85% of book value and has a PEG ratio of 1.95. Xerox is trading for 5.6 times free cash flow. The company pays a dividend with a yield of 2.07%.
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 consolidated just above long-term support at the $8 mark and has begun to move higher.
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's board of directors recently declared a 35% increase in the company's quarterly cash dividend to $5.75 per share. The dividend is payable on April 30, 2013, to shareholders of record on March 28, 2013.
Finally, 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. Now is an ideal time to start a position in the stock.
The Bottom Line
I believe these stocks are buys that have major upside potential in 2013. I see these stocks continuing to move higher as the year unfolds. With the market trading at all-time highs, I posit it is important to look for stocks that still have strong fundamentals. I have already heard a lot of scuttlebutt that many are already rotating out of stocks that have run up significantly and into these types of undervalued names. Always remember to maintain a well-balanced diversified portfolio containing several asset classes.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in on a weekly basis at a minimum to reduce risk. Set a stop loss order 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.