Rarely does good investing lead us to perfect stocks, instead we are often required to sift through the unwanted and unloved stocks. In the search for the largest discrepancy between price and value, this is often where the best investments are, among stocks overly punished for non fatal flaws. Below are a list of three companies that have their problems, but are worth a closer look from investors. Not only do they have fundamental upside, they have also drawn the attention of smart money investors. Notable shareholders are often useful because they have a history of success that likely improves the chances of a good investment, but they are also potential shareholder catalysts, serving a role that is nearly impossible for passive minority investors.
Level 3 Communications (NASDAQ:LVLT)
Southeastern Asset Management, Fairfax Financial Holdings, Blue Ridge Capital, Longleaf Partners
This company was once among the hottest stocks during the internet bubble, but it suffered in recent years because of overcapacity, limited pricing power and a large debt load. The company is still struggling, but its recent stock deal to acquire Global Crossing could provide a strong catalyst for future price appreciation. The consolidation of major industry players should improve pricing. In addition, LVLT's CEO James Crowe anticipates cost cutting opportunities of as much as $2.5 billion, with $200 million in the first 18 months. This would almost largely offset acquisition integration costs of $200 to $225 million. While it is all too common for management to justify high priced acquisitions (LVLT's buyout price was a 56% premium to the previous day's close) with promises of synergies, the $2.5 billion figure is so substantial relative to the sizes of the target and acquirer that it requires special attention.
General Motors (NYSE:GM)
Perry Corporation, Greenlight Capital, Capital Research Global Investors, Global Thematic Partners
The iconic American car maker has been mired in some political headlines following its controversial reorganization, but it is hard not to appreciate the improved position of this leading car manufacturer. The company has produced five profitable quarters after a miserable stretch that led to bankruptcy. Through brands like Buick, Cadillac, Chevrolet, GM, Daewoo, Isuzu, Holden, Jiefang, Alpheon and Wuling, GM has a strong position in domestic and international markets. The company will remain a dominant brand in the global automotive market for years to come.
General Motors' continued push into high gas mileage automobiles and greener technologies should keep the company at the forefront of the industry. Sales of the Chevy Volt have been mild to date, but the vehicle sales could continue to improve along with regulations increasing the hurdle for minimum gas mileage requirements. As another example of GM's commitment to the future, GM Ventures recently invested $6 million in Proterra Inc, a leading maker of zero emission buses. Not only does the company give GM great exposure to a growth market, it also improves its relationship with innovative VC firms like Kleiner Perkins Caufield & Byers.
With current prices near 52 week lows, GM trades at a trailing P/E of 7.17 and a forward P/E of 6.09.
SIRIUS XM Radio (NASDAQ:SIRI)
John Malone's Liberty Media, Capital World Investors, SAC Capital Advisors
While the satellite radio provider does carry a sizeable $3 billion of debt, the company is nowhere near the speculative stock that it once was. Between the funding deal with Liberty Media during the financial crisis and its strengthening business, the company's speculative nature is becoming moreso by reputation than actuality.
According to Mel Karmazin, the company is rapidly improving its operations and could have its technology installed in 70 million cars by 2015. This is a substantial population of potential users. In addition, the company will likely continue to benefit from the rebound in automotive sales. Finally, the company should also benefit from an increasing exposure in the used car market as new cars equipped with Sirius XM receivers roll off into the used car market as well as through active marketing-- like the recent deal among GM used car dealerships that offered 3 months of service.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LVLT, SIRI, GM over the next 72 hours.