In the past several weeks the markets have been in rally mode, and the major indexes are up around 9% in just the first months of 2013. However, a certain group of stocks have been experiencing mind-boggling gains in the past couple of weeks. Some investors and analysts have been calling it a "dash for trash" rally because many of the stocks seeing the biggest percentage gains were deeply depressed and considered "trash" by some investors and short sellers. In many cases this "trash" has turned into treasure almost overnight.
One area that has seen the biggest gains include stocks that are tied to the recovering housing market. Mortgage insurance companies have been leading the charge higher and burning short sellers. MGIC Investment (NYSE:MTG) shares were trading for around a buck late last year and then rallied to just over $2 in February. But that was just the beginning because in the past three weeks the shares have shot up from just over $2 to a new high of around $6. MGIC took advantage of the huge rally and raised capital by selling about 135 million shares. This will boost the strength of the balance sheet and that has already caused some analysts to raise ratings on the firm and even upgrade the stock. On March 5, Barclays (NYSE:BCS) raised the shares from underperform to outperform and increased the price target from $1 to $8. However, analysts still expect the company to post losses in 2013 of about 74 cents per share, so it might make sense to take at least some profits now.
Another mortgage insurance company called Radian (NYSE:RDN), has also seen huge gains. It was trading around $5 in early 2013, and recently surged to about $10. Radian also recently announced a secondary offer in which about 39.1 million shares were sold, raising around $300 million. Analysts are expecting this company to post a small loss in 2013, but see profits of about $1.13 per share for 2014. CNBC's Jim Cramer recently called this stock"a steal." However, I would wait for a pullback as the interest in the mortgage insurance stocks has started to look downright "frothy."
This huge rally in mortgage insurance stocks was preceded by a massive run in homebuilding stocks in the past several months. As home prices rise, mortgage insurers are likely to see fewer claims and a return to "normalized" earnings. The next sector that could be impacted by higher home prices is the furniture industry. As more homes are sold and if rising prices increases homeowner equity, consumers are more likely to furnish existing and new homes. That is why this could be the next sector to see a major rally. Plus, later in the article, I point out another stock that is not related to housing, but it fits other criteria and the profile of a stock that has been deeply "trashed" by investors. Because of this and also due to some recent signs of life, this stock could also surge. That stock is Zynga (NASDAQ:ZNGA) and a recent CNBC article even mentioned this stock as part of the "trash" rally. Here are a few stocks that trade below $4 to consider in what might be the next big dash for trash rally:
Furniture Brands International, Inc. (FBN) shares look dirt cheap at just around a buck right now for a number of reasons. However, the company has been reporting losses in recent quarters which has given shorts a reason to pile on. But that sounds very similar to the situations that Radian and MGIC experienced as those companies reported what seemed to be never-ending losses. Those stocks plunged to about $1 or $2 as shorts went in for the "kill" and longs were scared out of their shares for what was next to nothing compared to the share prices for these stocks today. Furniture Brands lost about $23.9 million in the fourth quarter, but it is important to note that nearly half of that loss was due to one-time charges like expense reductions and impairment charges. On the positive side, revenues rose about 3%. A small increase in profit margins combined with higher sales in the coming quarters could lead to break-even or possibly profitable results.
If shorts were wrong about mortgage insurance stocks that were posting very large losses even recently, then a strong case can be made for why shorts could be wrong about Furniture Brands International and here is why: This stock looks dirt-cheap because the market capitalization is currently equivalent to about 5% of annual revenues. The other big point that investors and shorts seem to be missing is the fact that this company owns many of the most valuable brands in this industry which include: Drexel Heritage, Henredon, Broyhill, Hickory, Thomasville, Lane Furniture, Lane Venture, and others. A single one of these brands could be worth more than the entire current market capitalization of this company, if it was sold to a major furniture maker or to a private equity firm.
With the housing market coming back, the rebound in home furnishings can't be far away and there is a flood of money looking for cheap assets to buy now. Furniture Brands management has been making efforts to cut costs and if furniture sales rebound, this stock could have major upside potential. If the company announced an asset sale or the sale of one of its well-known brand names, that could also be a major catalyst for the stock price. While this company has about $105 million in debt, that is not unreasonable considering that it has annual revenues of roughly $1 billion. Furthermore, this stock has potential for a short squeeze rally since there are over 4 million shares short, which is equivalent to about 6 days worth of average trading volume. As with any company that has posted losses, there are risks, but when a stock gets so cheap that the upside could lead to a potential multi-bagger (as was the case with the mortgage insurance stocks), it makes sense to consider buying a few shares for the tremendous upside potential.
Key Data Points For Furniture Brands From Yahoo Finance:
Current Share Price: $1
52-Week Range: 88 cents to $2.10
Zynga, Inc. shares sank to new lows in 2012, but investors are starting to take a fresh look at this fallen angel and the stock has rebounded off the lows. This company went public at $10 per share and initially went higher, but now the stock trades well below the IPO level at just around $3.70 per share. At that level, the shares still look undervalued, especially when you consider how much growth potential this company has in the coming years.
Zynga has developed some of the most popular online games which include: "Words with Friends" and "Farmville." It also offers a number of classic games including poker. However, the real money-making potential of this company might be just around the corner as it is rapidly moving towards real money gambling. Zynga has applied for a gaming license in Nevada and it recently launched two gaming websites in the United Kingdom.
Zynga's online gaming potential plus a very strong balance sheet, which includes well over $1 billion in cash and just about $100 million in debt, could make it a takeover target. Yahoo (NASDAQ:YHOO) recently said it was working on two significant acquisitions and possibly some smaller deals. A recent article on CNBC.com says that Zynga could be a potential takeover target for Yahoo. Whether the interest is from a tech giant or a casino company, Zynga could become a strategic asset that another firm snaps up soon.
Key Data Points For Zynga From Yahoo Finance:
Current Share Price: $3.73
52-Week Range: $2.09 to $14.48
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FBN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.