Even in a market that has been reaching new highs, there are always pockets of value that investors can take advantage of and position their portfolios for future gains. The key to outperforming the market for many investors is to buy low, but it is easier said than done since that means you often have to buy when other investors are selling or showing little interest in a stock. However, being a contrarian and buying stocks that have declined to what might be bargain levels can be immensely rewarding. For example, Genworth was an out of favor mortgage insurance company that was trading for just about $5 at this time last year and it has since gone on to nearly triple in value. Hewlett-Packard (HPQ) was also very out of favor and cheap at this time last year and it went on to double in value within a few months. These are just some examples of how rewarding it can be to buy stocks that are cheap and out of favor. With this in mind, here are some stock picks that bargain hunters should consider now:
Iridium Communications, Inc., (IRDM) offers satellite-based phone communications that function in just about any corner of the world. This company operates about 66 satellites that provide global coverage for customers who need to have telecommunication services in remote regions on land, or at sea or while flying. It appears to be one of the cheapest stocks in the telecom sector when looking at the price to earnings ratio and book value.
Iridium shares were recently trading for nearly $7, but declined after the company reported a small miss on profits. Analysts were expecting profits of 21 cents per share for the third quarter and the company reported 19 cents per share. Total revenues for the quarter came in at $100.6 million and net income was $16.6 million. Investors seemed to have overreacted to this earnings report and the stock is now trading below $6, which makes it extremely cheap in terms of the price to earnings ratio. It's worth noting that Iridium is investing in the development of new services and products, which could be putting pressure on profits now, but may add significant growth and upside potential in 2014 and beyond. Investors also seemed to overreact to a recent "downgrade." On November 1, Raymond James downgraded Iridium from strong buy to outperform which caused the stock to further decline into bargain territory that day. However, the analyst still rated it as an "outperform" so investors selling on this "downgrade" once again seem to be short sighted and overactive.
Analysts expect Iridium to earn 80 cents per share in 2013, and for earnings to jump by about 25% to $1 per share in 2014. That means this stock is trading for just about 6 times earnings, which is less than half the current average of 15 times earnings for the S&P 500 Index (SPY). It's also way below major telecom stocks like Verizon (VZ), which trades for about 17 times earnings (probably in large part due to its dividend yield and widely known brand name). Iridium shares also look very undervalued when you consider that book value is about $11.84 per share.
Iridium is planning to launch a satellite-based aviation-tracking network called "Aireon" which could significantly add to revenues in 2014. This division is expected to generate annual data fees from airlines and other private jets and planes, as well as a potential $200 million in one-time hosting fees. If this division were to be spun-off to shareholders it could create a lot of value.
Glenn Tongue of Deerhaven Capital has made a strong case for Iridium shares to be worth around $32 in 2017. He believes that Iridium's Aireon venture will add revenue growth and new clients in the coming years and that the stock has room for multiple expansion based on the fact that it is too cheap when compared to peers in this industry. He thinks the new Aireon joint venture could be worth $4 per share alone to Iridium shareholders. Hedge fund legend Whitney Tilson also has a bullish view on Iridium and he has said: "I believe this is an excellent company and the stock is significantly undervalued."
Iridium does face competition, which is a potential risk for investors to consider. However, this could also turn into a positive since other competitors might find it to be an attractive takeover target. For example, Intelsat SA (I) is one of the few companies that also offers satellite communications services worldwide. This company provides satellite communications, broadband, Internet, video, and private network services to customers such as the U.S. Government and other military organizations. This company has about $96 million in cash on the balance sheet and a market capitalization of about $2 billion, which is around four times the size of Iridium. Intelsat generates about $2.64 billion in revenues and analysts expect it to lose money in 2013 and be profitable in 2014.
Iridium is a smaller company with revenues near $400 million on an annual basis and around $275 million in cash on the balance sheet, which is equivalent to $3.60 per share in cash. This is one reason why it could be an attractive takeover target for a company like Intelsat or another major telecom company. A very cheap valuation and a new division that could add growth and profits in 2014 are more reasons why Iridium could be a takeover target. With plenty of longer-term upside, investors should be using the recent weakness as a major buying opportunity. Furthermore, the stock appears to have bottomed and could be due for a significant rebound in the short term.
Here are some key points for IRDM:
- Current share price: $5.67
- The 52-week range is $5.25 to $9.22
- Earnings estimates for fiscal year 2013: 80 cents per share
- Earnings estimates for fiscal year 2014: $1 per share
- Annual dividend: n/a
Advanced Micro Devices, Inc. (AMD) shareholders have had a tough year in 2013, as the company has reported disappointing financial results. The shares of this chip maker could remain volatile in the short-term and plenty of risks remain. However, if the company executes the stock appears to have significant long-term upside potential.
A major downside risk is that AMD is in a highly competitive industry with many deep-pocketed competitors like Intel (INTC) but it has a well-known brand name and it continues to get its chips in many key products. Earlier this year, AMD announced a deal to manufacture chips for the new Sony (SNE) PlayStation 4 game console and the next-generation Xbox from Microsoft (MSFT). However, these new developments have not begun to significantly improve financial results in 2013, as analysts expect the company to post a full-year loss of about 12 cents per share. In 2014, analysts expect revenues to jump from about $5.25 billion (in 2013) to $5.84 billion and profits to come in at 13 cents per share.
AMD shares have seen huge spikes in the share price many times in the past 25 years and extreme lows. For example, in the early 90s you could have bought the stock for just around a couple of bucks, then the stock rose sharply into the teens and then surged to about $45 per share during the 2000-2001 Internet and tech stock boom. The stock subsequently dropped below $5 in the tech stock crash, only to rise again to about $40 per share before the financial crisis of 2008. This shows that the company has been a survivor, and that buying the stock when many investors are bearish and when it is trading below $5 per share, has paid off historically.
About a year ago, AMD bought a company called "SeaMicro" which developed new technology that could allow it to compete in the server market that is currently dominated by Intel, which has a 96% share of the market. This could add significant revenues for AMD in 2014. At least one analyst believes this is very promising for the company and a Barron's.com article details the bullish outlook; it states:
"This time could be different. SeaMicro's technology looks good; its management team, astute; and the market opportunities, promising. One newly converted bull, Dan Niles, who bought AMD this year after being negative on its prospects last year, thinks the shares could go to over $8. Niles, who works at AlphaOne Capital Partners, sees this happening if AMD's revenue grows to $7 billion by 2015, and if its stock multiple of enterprise value to trailing 12-month sales rises from 0.7 times now to 1.3 times, which would bring it closer to Intel's 2.2. He considers this very possible."
When companies are posting losses or are not highly profitable, risks can be heightened for investors and it is even more important that the company has a solid balance sheet. Thankfully, AMD has plenty of cash, about $1 billion worth and around $2 billion in debt. The substantial cash balance gives the company financial flexibility and it reduces risks for investors. With the shares now trading for just over $3, and way below its former all-time highs and even 52-week high, this is a stock that may still face some downside risks, but which could be limited at these levels and more than worth taking when considering the long-term upside.
Here are some key points for AMD:
- Current share price: $3.30
- The 52-week range is $1.81 to $4.65
- Earnings estimates for 2013: a loss of 12 cents per share
- Earnings estimates for 2014: a profit of 13 cents per share
- Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.