These five stocks have catalyst for growth and substantial upside potential based on significant growth in earnings per share next year. Alcatel-Lucent, S.A. (ALU) has the most with an increase of 123% expected next year while SIRIUS XM Radio Inc. (SIRI) has the least, yet still substantial, at 30%. See chart below.
These facts alone carry little weight, but it's a good starting point when looking for speculative buying opportunities.
Additionally, the five stocks are trading at or below $5. Stocks trading for $5 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 highly speculative stocks that 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 $5 with strong EPS growth 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 catalysts. The following table depicts summary statistics and Wednesday's performance for the stocks.
The company is trading 40% below its 52-week high and has 1% upside potential based on the analysts' mean target price of $1.50 for the company. ALU was trading Monday for $1.48, down nearly 1% for the day.
Fundamentally, ALU has several positives. The company's EPS is expected to grow by 123% next year. ALU is trading for 1.3 times 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 is neither overbought nor oversold with an RSI of 47. The stock recently achieved the coveted golden cross which is bullish. Furthermore, the stock confirmed support by bouncing off the 200-day sma recently.
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. Moreover, ALU's cash flow worries seem to be well behind it at this point. I like the stock here.
Nokia Corporation (NOK)
The company is trading 30% below its 52-week high and has 3% upside based on its consensus mean target price of $3.73 for the company. Nokia was trading Monday for $3.62, down over 1% for the day.
Fundamentally, Nokia has several positives. Nokia is trading for 1.32 times book value, 36% of sales and has $3.51 in cash per share. EPS next year is expected to rise by 114% and is up over 110% 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. Currently, the stock is testing the bottom of the current uptrend channel. This is a good time to start a position.
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 along the bottom of the current uptrend channel, this is an ideal time to start a position. I like the stock here.
Sirius XM Radio Inc.
The company is trading 2% off its 52-week high and has 9% upside potential based on the analysts' mean target price of $3.48. Sirius stock was trading Monday for $3.19, down nearly 1% for the day.
Fundamentally, this stock has several positives. SIRI has a PEG ratio of .22. The PEG ratio is indicating SIRI is substantially undervalued. SIRI has a forward P/E of 25, and trades for 28 times free cash flow. EPS for the next five years is expected to rise by 30%. Quarter-over-quarter sales and EPS are up 14% and 127% respectively. 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. The stock recently bounced back from below the 50-day sma which is bullish.
The big news is Sirius' Board of Directors has approved a $2 billion common stock repurchase program. Secondly, new car sales are up significantly and SIRI is a derivative play on the auto industry. SIRI is well positioned for organic growth. SIRI is only in the early innings of building out its footprint.
The company added 529K self-pay subscribers during the quarter, up 41% from last year's level. The subscriber growth was achieved without breaking the bank as subscriber acquisition costs rose 8.5% to $126.7M.
The recent positive news regarding new car sales and a share buyback program bodes well for the stock. I like the stock at this level.
Zynga, Inc. (ZNGA)
The company is trading 73% below its 52-week high, and is trading 5% above the analysts' mean target price of $3.77. ZNGA was trading Monday for $3.94, up almost 10% for the day.
Fundamentally, ZNGA has a few positives. EPS is expected to grow by 80% next year and 21% over the next five years. The stock is trading for 1.54 times book value, and has $1.64 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 and the stock popped above the long-term downtrend line on Monday.
Zynga climbed 10% Monday on speculation that Yahoo Inc. (YHOO) might consider buying the company. Buyout rumors are always good, but never a good reason to buy a stock. 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. The recent developments regarding online poker being legalized bodes well for the stock. 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.
Advanced Micro Devices, Inc. (AMD)
The company is trading 69% below its 52-week high and has 8% upside based on the consensus mean target price of $2.81 for the company. AMD was trading Monday for $2.60, up over 1% for the day.
AMD has some fundamental positives. EPS is expected to grow by 84% next year. The company trades for approximately 34% of sales. AMD has $1.83 in cash per share. Insider ownership is up 60% over the past 6 months.
Technically, the stock has been consolidating at the current level for the last four months after a precipitous drop. I see this as a positive for the stock.
AMD is struggling due to the decline of the PC and has been vastly oversold. The company has been unable to break into the tablet market and its revenues are dropping precipitously. There is speculation that the semiconductor company could be headed for a buyout. Qualcomm (QCOM) has been mentioned as potential suitor. This would be a speculative buy, yet I posit the risk/reward equation favors longs at this point.
The Bottom Line
I believe these stocks are buys that have major upside potential. I see these stocks continuing to move higher as the year unfolds. With the market trading at all-time highs and these stocks being speculative in nature, take your time building a position and always remember to maintain a well-balanced diversified portfolio containing several asset classes. I would not allocate more than 5% of a portfolio to speculation.
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.