All eyes will be on the jobs report due out Friday morning. Even so, it appears to be a win-win scenario. Either we get a strong number and the market moves higher or we get a weak number, which will cause the market to sell off, offering a buying opportunity in stocks. Furthermore, a bad jobs number may induce the Fed to continue its OE program, which has been in question as of late. With the rest of the world employing QE and dropping rates, the door will be wide open for the Fed to continue easing.
The stocks covered in this article perhaps fall into the undervalued category. First, the shares of these companies are trading well below their consensus estimates and 52-week highs. The companies are trading on average 36% below their 52-week highs and have 16% potential upside based on their consensus analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.
Additionally, the five stocks have some positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These are stocks that may provide more bang for your buck.
In the following sections, we will take a closer look at these stocks to ensure the mean target prices are justified. We will perform a review of the fundamental and technical state of each company. Finally, we will determine if a catalyst for growth exists for the companies based on sector, industry or company specific dynamics. The following table depicts summary statistics and Thursday's performance for the stocks.
Alcatel-Lucent, S.A. (ALU)
The company is trading 37% below its 52-week high and has 17% upside potential based on the analysts' mean target price of $1.64 for the company. ALU was trading Thursday for $1.41, up over 11% for the day.
Fundamentally, ALU has some positives. The company's EPS is expected to grow by 108% next year. ALU is trading for 1.2 times book value. The company has $2.71 in cash per share. Book value per share is $1.09. Furthermore, the balance sheet and cash flow statement are much improved taking the cash burn worry out of the picture.
Technically, ALU just bounced off the bottom of the long-term uptrend channel. The stock recently achieved the golden cross, which is bullish. Nevertheless, the stock has been in a short-term downtrend for the past couple of months.
ALU surged 10% on Wednesday as Deutsche Bank upped the stock to a Buy citing the company's turnaround prospects. Deutsche Bank's Kai Korschelt stated,
"ALU has the key ingredients for a potentially successful turnaround: A new CEO with a solid cost-cutting track record, a likely positive revenue and margin inflection in 2013/14, and a termed out maturity profile."
Recently, ALU and China Mobile (NYSE: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 latest missive regarding the stock I started to pick up shares at the 200-day sma. I like the stock here, but would employ the three-day rule prior to starting a position after such a significant move.
Advanced Micro Devices, Inc. (AMD)
The company is trading 72% below its 52-week high and has 22% upside based on the consensus mean target price of $2.85 for the company. AMD was trading Thursday for $2.33, up nearly 1% for the day.
AMD has some fundamental positives. EPS is expected to grow by 87% next year. The company trades for approximately 31% of sales. AMD has $1.40 in cash per share. Insider ownership is up 68% over the past 6 months.
Technically, the stock looks weak at present. The stock has been consolidating at the current level for the last four months after a precipitous drop. I see this as a positive, yet the stock has broken below support in recent days.
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 (NASDAQ:QCOM) has been mentioned as a potential suitor. This would be a speculative buy, yet I posit the risk/reward equation favors longs at this point. The stock has an RSI of 35 and is approaching oversold conditions. I like the stock here, but definitely scale into any position.
Frontier Communications Corporation (FTR)
The company is trading 17% 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 Thursday for $4.07, up over 1% for the day.
Frontier has some fundamental positives. Frontier pays a dividend with a yield of 10%, yet don't buy the stock for the dividend only. The company is trading for book value, 80% of sales and has a forward P/E of $19. The company's gross margin is 91.19%. The stock is trading for 11 times free cash flow.
Technically, Frontier has been in a downtrend since late August of 2012. It has been in 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 which is positive.
The stock has a high short interest, which could serve as catalyst for a significant short squeeze. Frontier is currently trading at decade lows. I like the stock here.
Nokia Corporation (NOK)
The company is trading 32% below its 52-week high and has 10% upside based on its consensus mean target price of $3.69 for the company. Nokia was trading Thursday for $3.34, down almost 1% for the day.
Fundamentally, Nokia has several positives. Nokia is trading for 1.23 times book value, 34% of sales and has $3.46 in cash per share. EPS next year is expected to rise by 167% and is up over 119% quarter-over-quarter.
Technically, the stock seems to be forming a bottom. The stock has been in a free fall since the start of the year giving back all its gains since breaking above the 200-day sma in November of last year. Nonetheless, what was once resistance now becomes support. The stock is now trading 8% above the 200-day sma.
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. I like the upturn in the stock recently. The stock is a buy here.
Sirius XM Radio Inc. (SIRI)
The company is trading 7% off its 52-week high and has 13% upside potential based on the analysts' mean target price of $3.48. Sirius stock was trading Thursday for $3.02, down nearly 2% for the day.
Fundamentally, this stock has several positives. SIRI has a PEG ratio of .21. The PEG ratio is indicating SIRI is substantially undervalued. SIRI has a forward P/E of 24, 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 102%.
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. Nevertheless, the stock recently formed a double top, which is a bearish signal. The stock also broke below the 50-day sma.
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 recent positive news regarding new car sales and a share buyback program bodes well for the stock. I see the pullback as a buying opportunity. I would wait for some sign of a trend reversal prior to starting a position though.
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. The market is trading at all-time highs in the face of several negative market developments. I posit a correction may be in the works. With these stocks being speculative in nature, you may see a significant buying opportunity in the near future. Keep some powder dry to pick up shares at a discount. Furthermore, 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 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.