These five stocks have solid upside potential in 2013 and are well positioned for growth. Furthermore, some have gotten downright interesting based on improving fundamentals, valuation and solid growth stories.
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.
Now, simply selecting $10 stocks trading with some strong fundamental data is only the first step to finding winners that may provide alpha. We need to see if these dogs can hunt. I will perform a brief analysis and give my take on each stock below. You should perform further due diligence to determine if this is the time to start a position for yourself.
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 Friday's performance for the stocks.
Alcoa, Inc. (AA)
The company is trading 19% below its 52-week high and has 16% upside potential based on the consensus mean target price of $9.93 for the company. AA was trading Friday for $8.59, up almost 1% for the day.
AA has some fundamental positives. AA pays a dividend with a yield of 1.40%. The company is trading for a 31% discount to book value, 39% of sales and has a forward P/E of $9.83. EPS is up over 200% quarter over quarter.
Technically, AA has been in an uptrend since mid-November. The stock recently tested support at the bottom of the uptrend channel at the $8.40 mark. The golden cross was achieved at the start of February.
AA has been dead money for quite some time. This is the primary reason I have included the stock. With the market trading at all-time highs, many stocks are currently overbought. I posit investors may begin taking profits in their winners and rotating into stocks like AA. The company is growing EPS quarter over quarter and the stock hasn't moved yet. This one is a buy right here.
Frontier Communications Corporation (FTR)
The company is trading 18% below its 52-week high and has 15% upside potential based on the consensus mean target price of $4.69 for the company. Frontier was trading Friday for $4.05, down over 1% for the day.
Frontier has some fundamental positives. Frontier pays a dividend with a yield of 9.76%, yet don't buy the stock for the dividend only. The company is trading for book value, 82% of sales and has a forward P/E of $19.52. The company's gross margin is 91.19%. The stock is trading for 12 times free cash flow.
Technically, Frontier has been in a downtrend since late August of 2012. It has been a slight downtrend though and the stock has mostly moved sideways. Recently the stock has begun to tick up. The 200-day sma has leveled off and started to trend upward.
The stock has a high short interest. This can either be seen as a negative or a positive depending on your point of view. Nonetheless, I like the stock here, Frontier is currently trading at decade lows and a high short interest provides the opportunity for a significant short squeeze.
Groupon, Inc. (GRPN)
The company is trading 72% below its 52-week high and on par with the consensus mean target price of $5.38 for the company. Groupon was trading Friday at $5.35, up over 5% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 17 and trades for 20 times free cash flow. EPS and sales are up 3% and 30% respectively quarter over quarter. EPS next year is expected to rise by 50% and by 22% 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 50% and broke through the first level of resistance at the 50-day sma. The 50-day sma has leveled off and I can see the golden cross potentially coming into play as time goes on.
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.
In my latest missive regarding the stock I stated to wait until after earnings to get in because they would most likely kitchen sink the quarter. That is exactly what happened. The stock sold off over 20%, yet bounced right back afterwards. I started a position and am now long.
LSI Corporation (LSI)
The company is trading 25% below its 52-week high and has 21% potential upside based on the analysts' consensus mean target price of $8.38 for the company. LSI was trading Friday for $6.93, down almost 2% for the day.
LSI has several fundamental positives. The stock has a projected EPS growth rate for the next five years of 13%. LSI has a rock-solid balance sheet with a significant percentage of market cap in cash. LSI has a PEG ratio of 1.55. The forward P/E ratio is 9.79.
Technically, the stock is at the apex of a descending triangle. This is known as the break out position. The stock has been in a short-term uptrend since mid October. The stock looks ready to break out to the upside.
I like the stock here, yet would wait for the stock to break out one way or the other prior to starting a position to reduce risk. The company has recently signed a deal with NetApp (NTAP) that could be a game changer for how applications handle data. I like the stock here.
MEMC Electronic Materials Inc. (WFR)
The company is trading 20% below its 52-week high and 25% upside potential based on the consensus mean target price of $5.70 for the company. WFR was trading Friday for $4.59, down almost 4% for the day.
Fundamentally, WFR has some positives. The company has a forward P/E of 14. The company is trading for approximately two times book value and 52% of sales. WFR's EPS is up 99% quarter over quarter and expected to rise by 70% next year.
Technically, the stock looks like it may have put in a bottom at the $2 mark. The stock has been on a roll and is in a solid uptrend. All major moving averages are now trending upward and the golden cross has been achieved. Nevertheless, the stock is currently overbought with an RSI of 86. Wait for a pullback to get in.
President Obama has been very direct regarding his position on green energy. Solar power is a major part of this effort. Obama discussed these initiatives at his inauguration and again at the State of the Union address. This is great news for WFR.
WFR was on a roll until it gave soft guidance on its latest earnings report conference call. Then added to the losses Friday as Jefferies slashed its price target to $4 from $4.50. The firm expects shares to be range-bound, with chip industry trends determining their fate. Goldman, on the other hand, provided a more positive take yesterday, forecasting "a robust second half of 2013 buoyed by cyclical strength in semis." I'm in Goldman's camp and see this as an excellent buying opportunity.
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. Nevertheless, remember these are speculative stocks trading for less than $10. I would never allocate more than 5% of my portfolio to speculative investments. Always maintain a well-balanced diversified portfolio containing several different asset classes suitable to your specific financial status.
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 scaling into the position to reduce risk.
Disclosure: I am long GRPN.
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.