As great as it is to find a cheap stock, it is even better to find cheap stocks with upcoming catalysts. Over the last few years, rising asset correlations trained investors to follow macro market factors. But stock specific factors like earnings announcements still matter.
Last week we mentioned grocer SUPERVALU (SVU). We wrote, "the company is worth a closer investigation. Based on the current distress, the company could be leveraged for upside on any better than expected news." Following better than expected earnings, the company jumped 17%. (Click here for the Earnings Call Transcript)
Here are some cheap companies with earnings next week that investors should watch:
US BANCORP (USB)
- Forward P/E: 10.05
- Price/Sales: 3.66
- Price/Book: 1.80
- ROA (ttm): 1.11%
The Minneapolis-based bank is a Berkshire Hathaway (BRK.A) holding with significant upside potential and cheap valuations. While mega banks like Wells Fargo (WFC), Bank of America (BAC) and JP Morgan (JPM) are trading at similarly cheap valuations, U.S. Bancorp could provide greater upside in the long run as it is still operating below the U.S. regulatory cap on deposits. With over 3,000 branches, the company is already a well established operation, but compared to Bank of America's 5,900 branches, it's clear that U.S. Bancorp has room for growth.
We previously highlighted U.S. Bancorp because it currently trades below Buffett's cost basis of $30.76 per share. This alone should provide incentive for investor interest, but taken together with the company's cheap valuations, great management and advantageous strategic position, the stock is very attractive.
GOLDMAN SACHS (GS)
- Forward P/E: 8.28
- Price/Sales: 2.18
- Price/Book: 1.21
- ROA (ttm): 0.95%
Based on recently reported earnings from JP Morgan and Bank of America, it is reasonable to believe that Goldman Sachs' earnings will be strong in investment banking and asset management but weak in trading performance. While this could cause weakness, Goldman Sachs has been the premiere name in finance and as such, weakness should be viewed as an investing opportunity. The company's management and culture successfully steered it through the worst of the financial crisis and its reputation has given the company the upper hand in high sought after deals like the $1.5 billion Facebook private placement.
INTEL CORP (INTC)
- Forward P/E: 8.99
- Price/Sales: 2.46
- EV/EBITDA: 4.34
- ROA (ttm): 16.76%
The leading maker of computer processors has been hurt by the rising popularity of the tablet industry. Like many others, Intel was caught off guard by the success of Apple's (AAPL) iPad-- largely because the product was long considered a dead end with little real demand. As the market considers how tablets will affect the PC market, Intel strength in the PC market is now viewed as a relative weakness.
While Intel has joined the tablet wars, its Atom processors are considered inferior to those of tablet processor leader, ARM Holdings (ARMH). But despite its unfamiliar market position in the tablet space, Intel Corp's cheap valuations, history of success and aggressive development of its next generation Cloverview processors make Intel an interesting investment. With tablet shipments expected grow from 18 million in 2010 to 44.6 million in 2011, tablets will likely be a growth market for Intel in the future. As is often the case, the market may be overreacting to the headlines. While Intel trades at a price/sales of 2.46, its tablet competitor ARM Holdings has a price/sales of 19.48.
- Forward P/E: 11.41
- Price/Sales: 2.01
- ROA (ttm): 11.21%
The U.S.-based company has one of the most iconic brands in the world, but interestingly enough, it recreated itself from a hardware designer and manufacturer into an international information technology products and services provider.
Recently, the company has increased profits by growing revenues and decreasing costs. Between 2009 and 2010, revenues grew 4.3% while gross margins improved 0.4% and expenses as a percentage of sales decreased 0.5%.
The company's segments are all highly profitable with the following gross margins in 2010:
- Global Technology Services: 34.7%
- Global Business Services: 28.3%
- Software: 86.9%
- Systems and Technology: 38.5%
- Global Financing 51.3%
As strong as the company's performance has been, one of the key strengths are the growth opportunities. In 2010, revenues from the Americas still represented 43% of sales. With Europe / Middle East / Africa actually declining 2.2% and Asia only 25% of sales, there are growth opportunities abroad.
We think that IBM provides great long term opportunities for investors. Not only does it operate in high return businesses, the company also has a growing global footprint and low valuations. Considering that the stock has had a very strong run since Bernanke's Jackson Hole speech, we think investors should wait for further stock weakness.
JOHNSON & JOHNSON (JNJ)
- Forward P/E: 11.74
- Price/Sales: 2.67
- ROA (ttm): 10.46%
Johnson & Johnson can't seem to get out of its own way. The company has one of the world's premiere brands, a rare AAA credit rating, and a dividend yield of 3.60%, but the stock has underperformed because of continuing problems related to a string of drug recalls.
While the company's drug manufacturing segment has attracted a seemingly constant stream of negative headlines, the consumer OTC pharmaceuticals & nutritionals segment plus the pharmaceuticals division represented roughly 44% of the conglomerate's total 2010 sales. The recalls are clearly a major problem that have had real consequences for consumers, for financials and for the JNJ brand name. But the problems underlying the recalls seem to be an issue with procedure and process, rather than something inherently wrong with the usefulness, safety and effectiveness of the drugs. As a result, we think JNJ will weather these problems.
Going forward, we view Johnson & Johnson's price weakness as a buying opportunity. Considering the company's brand value, international footprint (around 50% of the company's revenues are international) and product diversity, JNJ is an investment that's hard to beat at these valuations. If that isn't convincing enough, Buffett's cost basis for his JNJ shares were $61.06, meaning that investors can currently purchase shares below Buffett's entry price.
SEAGATE TECHNOLOGIES (STX)
- Forward P/E: 8.82
- Price/Sales: 0.70
- ROA (ttm): 10.93%
The disk drive maker's stock has underperformed recently, in large part because of fears that disk drive demand will decline as solid state drives become cheaper and as tablets displace traditional desktops and laptops. While these risks are real, the valuation makes the company very interesting. In 2010, private equity names were close to acquiring the company but the deal fell through following a decline in the broad market as well as rising popularity of tablets.
If investors are drawn to Seagate because of the eye poppingly cheap valuations, they may like that the company recently announced a quarterly cash dividend of $0.18 per share, which at the time was roughly a 5% yield. The company had previously paid a dividend but suspended it during 2009 because of market uncertainty. We think the stock provides opportunity especially if the stock price declines further. Following the announcement that the potential deal fell through, the company announced a $2 billion share buyback. If the company reveals that it purchased a significant amount of stock, that piece of information-- as well as the recent dividend-- could be a bullish signal for investors.