The Market Pullback Is A Chance To Buy These 2 Stocks Cheap

Includes: GM, GNW
by: Trade In Mexico

As we head towards the Fall and Winter months, now it a good time to assess your portfolio holdings. In the current market environment, I would be selling or shorting weak and very overvalued stocks like West Marine (NASDAQ:WMAR) which I recently wrote about in this article. Selling or shorting stocks with poor fundamentals, new auditors and disappointing financial results like West Marine will allow you to benefit from downside moves. On the other hand, picking up strong stocks which have experienced a temporary pullback will allow you to use the recent dip to build your portfolio for long-term success. There are a few reasons why these stocks are likely to keep moving higher and that is why using market pullbacks makes sense now.

Many investors fear the potential for the Federal Reserve to taper and now it seems the market is highly concerned about a potential U.S. strike on Syria. This is creating a buying opportunity in a number of stocks that are cheap and in a solid longer-term uptrend. I think fears about tapering are overblown and with recent data showing the U.S. economy is not that strong, it is highly doubtful the Federal Reserve will taper at all in September. The United States now has warships within striking distance of Syria. President Obama described the use of chemical weapons as a "red line" and since many officials believe that Syria used chemical weapons, there seems to be little doubt that President Obama has to act. However, a U.S. strike is likely to be very limited and I think that nothing more than a few missiles will be sent out against some suspected chemical weapons plants or depots.

When the markets see that the plans for a September taper and a U.S. missile strike are potentially nothing more than paper tigers, strong stocks with sound fundamentals are likely to resume the uptrend in short order. With this in mind, here are stocks to consider buying now thanks to the recent market weakness:

Genworth Financial Inc., (NYSE:GNW) shares have been in solid uptrend throughout 2013. This trend is likely to continue because the stock remains cheap when compared to the rest of the market. In addition, the fundamentals are improving for mortgage insurance companies like Genworth as the U.S. real estate market is seeing price appreciation in just about every region.

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As the chart above shows, Genworth shares are now trading near the low end of the recent trading range as indicated by the blue trendline. Investors who have been buying Genworth shares on pullbacks throughout this year have generally done very well, especially when the stock is trading at or near the low end of the recent trading range, as it is now.

Earnings estimates for Genworth are at $1.13 for 2013, and $1.43 for 2014. That implies a price to earnings ratio of just about 10 times earnings for 2013, and just around 7 times earnings for 2014. That makes Genworth shares a bargain when compared to the market in general. For example, the S&P 500 Index (NYSEARCA:SPY) trades for about 15 times earnings. Genworth also looks extremely cheap when compared to other financial stocks. Earnings estimates for Bank of America (NYSE:BAC) are just 91 cents per share for 2013 and $1.36 for 2014. Bank of America trades for over $14 per share while Genworth is just around $11.65 per share and yet Genworth is expected to earn substantially more for both this year and next year. There is such a wide disparity in valuation that I would even suggest selling Bank of America shares in order to buy the much cheaper Genworth shares. Genworth also looks cheap when you consider book value which is $29.74 per share, while BofA has a book value of about $20.18 per share.

Genworth appears poised to benefit from the rebound in the U.S. housing market and from the recent rise in interest rates. Companies like Genworth have significant investment portfolios which typically earn more money when interest rates are at higher levels, so a recent increase in rates could boost earnings. Nonetheless, investors should consider downside risks such as another major recession or housing market plunge. However, those risks seem very limited at this time and the bargain-like valuation of the stock at just around 7 times 2014 earnings and less than half of book value seem to make this stock a compelling buy on the current pullback.

General Motors (NYSE:GM) shares have also been in a solid uptrend throughout 2013 and this upward move should continue for a number of reasons. GM is poised to benefit from a rebound in the European economy, and from an eventual end of U.S. Government ownership. Even though the stock is up this year, the valuation is still very cheap for long-term investors to consider.

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As the chart above shows, GM shares are now trading at the low end of its recent trading range (right around the blue uptrend line). Investors who have bought pullbacks in GM this year have generally been rewarded. I believe the same will hold true for this pullback because GM has solid fundamentals, a strong balance sheet and the stock is cheap when considering the PE ratio.

Analysts estimates for GM are at $3.40 per share for 2013 and $4.55 per share for 2014. This means the stock is trading for less than 10 times earnings this year and for just about 7 times earnings for 2014. While some stigma from a bankruptcy and a U.S. Government bailout seems to haunt this stock, that view seems unwarranted because the U.S. Treasury is expected to sell its GM holdings by January 2014, or so. The end of U.S. Government ownership could spark a major rally in GM shares similar to what was seen after the U.S. Government sold the last of its position in American International Group, Inc. (NYSE:AIG). This could also put GM in a position to announce a dividend in the not too distant future. GM has a strong balance sheet with about $24.2 billion in cash and around $26.75 billion in debt. For all of these reasons GM is a much stronger company than some investors give it credit for.

Another major economic crisis, or a surge in oil prices or much higher interest rates are potential downside risks for GM shares. However, the more likely scenario appears to be for GM to continue with strong sales in the U.S., and for it to enjoy many years of potential growth in China where Buick is a popular brand. It also looks like the economy in Europe is positioned to return to at least a little growth in 2014 and that should also become a positive catalyst for this stock.

Some analysts see strong upside potential in GM. David Whiston, an analyst with Morningstar believes that GM is worth about $52 per share. Other top analysts are also bullish. On July 26, 2013, analysts at RBC Capital Markets gave GM shares a outperform rating and set a $45 price target. On the same day, analysts at Barclays gave the shares an overweight rating and set a $48 price target. It appears to be just a matter of time before the U.S. Government sells its stake in GM, and that should act as an upside catalyst and allow the company to initiate a dividend. That is why it's time to buy this stock on pullbacks before those upside catalysts occur.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I am long GM, GNW. 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. I may short WMAR soon.

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