In the following sections I will review five stocks on my watch list I am looking to buy at a discount. These stocks are trading on average 33% below their 52 week highs and have 17% upside on average based on consensus estimates. These facts alone mean little, but it is a good starting point when looking for undervalued stocks. The fact is these stocks are all long-term investments with solid secular stories for future growth. With the market near all-time highs it is important to look for companies with improving fundamentals. I believe these stocks will outperform the market in the coming months based on these facts.
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. Furthermore, I will discussion the potential growth catalysts for each company. The following table depicts summary statistics and Thursday's performance for the stocks.
Apple Inc. (AAPL)
The company is trading 41% below its 52-week high and has 47% upside potential based on the consensus mean target price of $601 for the company. Apple was trading Thursday for $409.39, up nearly 1% for the day.
Apple is fundamentally sound. Apple has a forward P/E ratio of 8.30, a PEG ratio of .44 and trades for approximately 9 times free cash flow. The company has no debt and over $100 billion in cash. The company pays a dividend with a 2.61% yield. Margins took a hit yet the company still achieved a 25.35% net profit margin.
Apple has been in a well-defined downtrend for the past five months. The stock has fallen from a high of over $700 to a low of approximately $391. The stock seems to be forming a bottom at the $400 level.
Apple reported earnings on April 23rd. Fiscal second quarter EPS of $10.09 beat the Street estimates by $0.02. Revenue of $43.6 billion, up 11% year over year, beat by $1.1 billion. You can read the transcript here. Nevertheless, guidance was light leaving the stock unchanged. One point I like is Apple plans to borrow to help pursue its goal of returning $100 billion to shareholders by the end of 2015. This effectively solves the tax issue of using offshore funds.
The reasons I am still bullish on Apple is I believe Apple will continue to raise the dividend, buy back shares, launch a low end iPhone to address emerging markets and regain their innovative status by introducing the iWatch and iTV at some point. These catalysts along with their normal product refresh cycle kicking in makes this stock a buy. Very little of the potential upside is priced in to the stock.
Ford Motor Co. (F)
The company is trading 5% below its 52-week high and has 12% upside based on the analysts' mean target price of $15.14 for the company. Ford was trading Thursday for $13.48, up over 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 7.98. Ford is trading for 18 times free cash flow and approximately 3.3 times book value. EPS next year is expected to rise by approximately 20%. The company pays a dividend with a yield of 3.00% and has a PEG ratio of 0.89 and a net profit margin of 4.22%.
Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since the last quarter. The stock achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma. Now the stock is in breakout position at the apex of a descending triangle.
Ford reported earnings on April 24th. Ford's first quarter EPS of $0.41 beat estimates by $0.04. Revenue of $35.8 billion beat by $2.03 billion. Ford beat results due to North America and Asia offsetting weakness in Europe and South America. Ford reiterated its forecast for strong sales and double-digit operating margin in North America. You can read the transcript here.
Ford states it will double its market share in China over the next three years as new products hit the Chinese market. Moreover, Ford's March U.S. sales were up 5.7% to 236,160 vehicles, beating the estimate of analysts calling for a 4.4% gain.
Ford's issue has been Europe. Nevertheless, the European right sizing program seems to be culling loses. With improving sales in China and the U.S., I posit Ford is set to break out to the upside. Ford is a buy here.
Facebook Inc. (FB)
Facebook is trading 42% below its 52-week high and has 27% potential upside based on a consensus mean target price of $33.20 for the company. Facebook was trading Thursday for $26.20, less than 1% for the day.
Facebook's fundamentals are mixed. The company has a forward P/E of 33. EPS for the next five years is expected to rise by 30% and 36% next year. Sales are up quarter-over-quarter and the company has a net profit margin of 1%.
Technically, Facebook looks mixed. The stock has achieved the coveted golden cross, yet has recently broken through support at the 50-day sma. The stock is resting at the apex of a descending triangle pattern. This means the stock is about the break out. The question is what direction.
Facebook recently unveiled a modified version of Android with deep native Facebook functionality that may live on an HTC handset. Now, news is out that Facebook is in the process of offering this service on Apple and Microsoft devices as well. I think this is a great move by the company.
I am an active Facebook user and have adopted the new app update. I like the interface. I posit Facebook is going to surprise on earnings due out on May 1st. I like the stock here. Facebook is a buy at this level.
Citigroup, Inc. (C)
The company is trading 2% below its 52-week high and has 13% upside potential based on the analysts' mean target price of $53.43 for the company. Citigroup was trading Thursday at $47.11, up nearly 1% for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 8.87. Citigroup has a price to book ratio of .74. The company has a PEG ratio of 1.26 and a net profit margin of 12.37%. EPS is up 31% quarter over quarter.
Technically, the stock is in an uptrend and current trading at the mid-point of the channel. The golden cross was achieved at the beginning of October. The stock looks solid technically.
Citigroup's board just approved a $1.2 billion stock repurchase program through the first quarter of 2014. The announcement was made in conjunction with the declaration of the $0.01 quarterly dividend.
Citigroup should benefit greatly from its focus on cost cutting and the resurgence of the US housing market. The company aced the Fed's stress test. Citigroup looks poised for solid earnings growth in 2013.
Groupon, Inc. (GRPN)
The company is trading 57% below its 52-week high and 15% above the consensus mean target price of $5.49 for the company. Groupon was trading Thursday at $6.47, up over 1% for the day.
Fundamentally, the stock has positives. The stock has a forward P/E ratio of 21 and trades for 25 times free cash flow. Sales are up 30% quarter over quarter. EPS next year is expected to rise by 43% and by 24% for the next five years and is up 90% this year.
Technically, the stock has leveled off and began trending upward. The stock has rebounded 50% and broke through all three major resistance levels. The 50-day sma has turned up and the golden cross has been fulfilled.
I am bullish heading into earnings on May 8th. The company may deliver a better than expected first quarter daily deal take rate. This would cause the stock to best estimates. A recent deal announced with Starbucks (SBUX) sold out in minutes.
Groupon is investing heavily in creating a broad assortment of local commerce tools and services for merchants. This should help support and diversify revenue. Groupon has $1.2 billion of cash, no debt and expectations are low. I like the stock here for a long-term speculative play.
The Bottom Line
I believe these stocks are buys that have major upside potential. 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 sold off regardless of their future prospects, you may get a chance to pick them up at an even greater discount over the next few months. Hopefully you have some powder dry and can take advantage.
Furthermore, 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 to reduce risk.
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.