Cooper Tire & Rubber Co. (CTB) shares have been very volatile and apparently trading more on recent court rulings than on its fundamentals. This company is one of the world's largest manufacturers of replacement tires. Cooper Tire & Rubber shares surged to about $34 in June after a buyout offer for $35 per share was made by Apollo Tyres. The deal seems to have turned into a soap opera and appears to have been a waste of time since it hit snags along the way. Many investors realized the deal was not going to happen and a court ruling announced on December 16, seems to confirm that it is over. Even though the stock had already given up the gains it had when the buyout offer was announced, it still was hammered on this news and dropped about 5% at the close, on very heavy volume of over 5 million shares in what appeared to be a capitulation-like event. I think this is great news as it appears to have created a major buying opportunity.
Between March and June, (before the deal was announced), this stock was trading for about $23.50 to $28 per share. Copper Tire & Rubber shares now trade for less than that now, which seems to indicate that the selling has become nonsensical. This seems to especially be true when you consider the major rally this market has experienced since June. Also, other auto sector stocks have seen tremendous gains since June. For example, Goodyear Tire (GT) which is one of the world's largest tire makers, has seen its shares nearly double in value from about $14 in June, to nearly $23 today. Ford (F) shares are up about 50%, since April, and General Motors (GM) shares are up from about $32 in June to over $40 today.
The major gains in just about every auto sector stock reflects the greatly improving economic conditions in Europe and that fact that there no longer appears to be a strong chance for a financial crisis in that region. Concerns over a "hard landing" in China also seem to be diminished and the U.S. economy is experiencing improvement in the jobs market. When more people have jobs, they drive more and need more replacement tires. All of these factors point to reasons why the pullback in Cooper Tire & Rubber shares seems out of whack. The economic fundamentals for the tire business and the market itself is much better than it was in June when Cooper Tire & Rubber shares where trading around $24 to $26, and yet the recent plunge over the collapse of the deal has taken the stock down to about $21.50 per share. That appears to be a major overreaction which is why I see a big buying opportunity now. In my opinion, this company is simply not worth less today than it was before the deal was announced, and there is a strong chance this stock will rebound soon.
As the chart above shows, Cooper Tire & Rubber shares are oversold with a relative strength index of about 27. It also clearly illustrates how cheap the stock is now. In spite of a significant market rally and a bull market in auto sector stocks, you can buy Cooper Tire & Rubber shares for less than you could before the deal was announced in June. One big reason for this is probably because many investors bought the stock when the deal looked solid, and have ended up losing money. This has created a lot of potential tax-loss selling in these shares which can put plenty of downside pressure on a stock at this time of year. Another reason it is probably cheaper than it should be is because shorts have piled into this as a momentum play on the downside due to the strong chances of the deal falling apart. However, shorts could help fuel a major rebound in a short covering rally that could be likely when tax-loss selling pressure ends by December 31. According to Shortsqueeze.com, the are over 6.6 million shares short and with an average trading volume of about 868,000 shares per day, the short position is equivalent to nearly 8 days worth of trading volume or almost 12% of the float. That is enough to potentially create a short-covering rally, especially after tax-loss selling ends in just the few remaining trading days of 2013.
With the potential downside risk from the deal falling apart already having done a lot of damage, that risk seems diminished and even overplayed now by the shorts. Another global recession is a potential risk, but with the European economy showing signs of recovery and the U.S. economy moving forward, that risk appears limited for now. Furthermore, as this company has about $244 million in cash and around $396 million in debt which means it is financially solid and that reduces risks for investors.
Analysts expect Cooper Tire & Rubber to earn $3.11 per share in 2014 and that puts the price to earnings ratio at just about 7 times. In a market where the S&P 500 Index (SPY) is trading for around 16 times earnings, that valuation looks very attractive. Other positives to consider include the fact that this company pays a dividend of 42 cents per share which yields about 1.7%. With earnings expected to come in at over $3 for 2014 and with a strong balance sheet, the dividend appears to have room to grow. Also, when compared to Titan International, Inc. (TWI) which is an industrial tire maker that trades for nearly $17, and is expected to earn just $1.08 per share in 2014 (which is about one-third of estimates for Cooper Tire & Rubber), this also builds a strong case for why this stock is oversold and deeply undervalued. Cooper Tire & Rubber also has one of the strongest balance sheets when you compare it to its peers. I believe that the end of tax-loss selling (in what is known as a January Effect Rally) and the cheap valuation will cause this stock to rebound very soon. The above-average level of short interest could help fuel that rally. To read more about the January Effect Rally and see more of my top stock picks to buy now for this strategy, please read this article.
Here are some key points for Cooper Tire & Rubber:
Current share price: $21.60
The 52 week range is $20.55 to $34.79
Earnings estimates for 2013: $2.69
Earnings estimates for 2014: $3.11
Annual dividend: 42 cents per share which yields 1.7%
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informational purposes only. You should always consult a financial