Real money can be made in market downturns like the one we have seen over the past several weeks. While many investors are reeling from losses and have become frozen with fear, I believe it's times like this where you want to go shopping for some cheap stocks in a depressed market. Too many investors were lax and failed to take profits in sectors that had run too far such as the oil stocks, rare earths, silver, etc. I wrote articles weeks and months ago stating that I believed it was time to take profits in oil and energy stocks, silver stocks and rare earth stocks. At the time, my ideas to sell these sectors at or near their highs seemed foolish to many and I received a number of negative comments on these articles but the results are clear now and it shows it often pays to go against the crowd.
Just as I believed the hottest sectors in the market were ripe for a correction, I now believe certain sectors and stocks have come down too far. The stocks below have been hit hard in the market correction and might offer substantial rebound potential in the coming months. While the economy shows signs of softening from the effects of high energy costs, the disaster in Japan and the end of some current stimulus programs, things could improve later this year. We have already seen gasoline prices drop and Japan rebuilding efforts could start kicking in soon, which could result in higher demand for certain goods. For more than a year, the markets have repeatedly sold off in the months between earnings season, only to rally just before and during earnings season. This pattern is repeating itself and I expect markets to see a rebound as we get closer to the next earning season in just a couple weeks. We are very close to earnings season and there have not been many earnings warnings released, so that is another good sign. It's funny how quickly investors and the media go from excitement over better than expected earnings to fretting over what happens to Greece and Syria when they don't have earnings to focus on. Also, in spite of any continued economic weakness, stocks still remain the best asset class for the long term. With that in mind, I believe these stocks are well positioned to rebound higher from their current levels later this year. I would only buy these stocks in stages, so I can take advantage of any further dips in these names, if there are any. Here are the first 5 of the top 10 picks and the other 5 will be in another article (part two) soon:
American Axle (NYSE:AXL) shares are trading around $10.70. AXL is a leading manufacturer of automotive components. The 50 day moving average is about $11.18 and the 200 day moving average is about $11.79. Earnings estimates for AXL are $1.79 per share in 2011. The PE ratio is about 5.
Why AXL could rebound in 2011: The stock dropped hard from around the $15 level earlier this year, down to nearly $10. This has created a buying opportunity to pick up cheap shares and it looks like management is taking advantage of this lower price as they have been buying shares. You can see the repeated insider buying here. With gas prices coming way down in the last few weeks, truck and auto sales could see a rebound in the second half of the year which will benefit AXL.
Brown Shoe Co., (BWS) shares are trading around $10.50. Brown Shoe is a leading wholesaler and retailer of shoes and is based in Missouri. These shares have traded in a range between $8.85 to $18.38 in the last 52 weeks. The 50 day moving average is $10.86 and the 200 day moving average is $12.36. Brown Shoe is estimated to earn about $1.19 per share in 2011 and $1.50 for 2012.
Why BWS could rebound in 2011: These shares appear to be a bargain for only 6 times 2012 earnings. Another plus is that BWS pays a 28 cent per year dividend, which is equivalent to a 3% yield. Again, with gas prices coming down substantially, consumers will have more discretionary buying power for shoes which could benefit BWS in the second half of 2011.
Hartford Financial (NYSE:HIG) shares are trading at $25.43. These shares have a relative strength index of about 33 which indicates the shares are oversold. HIG is a leading insurance company. HIG shares have fallen with the markets and also due to concerns about policies they have in Japan. The 50 day moving average is $27.17 and the 200 day moving average is $25.77. Earnings estimates for HIG are $3.80 per share in 2011. HIG pays a dividend of about 40 cents per share, which is equivalent to a yield of about 1.5%. In
Why HIG could rebound in 2011: This stock is trading for about 6.5 times earnings and well below book value which is stated at $45.93. People need insurance even when the economy is not great so their business is solid and can continue to grow especially as the economy improves.
LDK Solar (NYSE:LDK) is trading at $7.17. The 50 day moving average is $8.52 and the 200 day moving average is $10.76. LDK has very strong earnings and based on guidance from the company, it appears they could earn over $3 per share in 2011. According to Yahoo Finance, LDK has $3.61 per share in cash and has a book value of $9.39, so these shares are trading well below book value.
Why LDK could rebound in 2011: Shorts have gone too far and sentiment is too negative in most solar names. This negativity pushed most solar names down to extremely low valuations but they have started to rebound already. There is growing evidence that the pricing pressures caused by excess inventory will improve in the 3rd and 4th quarters and improve even more in 2012. Because the markets are forward looking, we should see continued gains in the solar stocks now that the 2nd quarter is nearly over. Furthermore, the CEO of LDK Solar recently called the share price "grossly undervalued" and the board authorized a $110 million share buy back, which you can read about here. The combination of a major corporate share buyback and the fact that there are currently over 35 million shares short in this stock makes a recipe for many shares being bought at higher prices in the coming weeks and months. Between the shorts and the corporate buy back this is a potential quantity of about 50 million shares to be bought in LDK over the coming months. If other investors, a hedge fund, a mutual fund or LDK makes a major buy in a short period of time, it could ignite a rocket fueled short squeeze and there is no way for shorts to know when and if this will happen.
This makes it a rather uncomfortable position for shorts and the only thing they do know is that the short trade is very crowded. Crowded trades often end badly for those involved and I expect it to end badly for shorts at these levels. Shorts were also heavily involved in shorting Sunpower (SPWRA) and lost big when Total announced a major deal with them. Several days ago, I wrote that solar stocks in general had bottomed out.
Gafisa SA (NYSE:GFA) shares are trading around $9.40 per share. Gafisa is a major home builder based in Brazil. These shares have traded in a range between $9.06 to $18.24 over the past 52 weeks. GFA earnings estimates are about $1.27 per share in 2011 and $1.51 for 2012. The 50 day moving average is $10.76 and the 200 day moving average is $13.18.
Why GFA could rebound in 2011: These shares dropped too far too fast and recently hit a new 52 week low at $9.06. Brazil's economy is tied to oil prices which have been weak lately and that has hurt some Brazilian stocks like Gafisa. However, the sell off is overdone and the shares are even trading below stated book value of $10.86 per share. I would buy this in stages to take advantage of any further weakness.
The data is sourced from Yahoo Finance and Insidercow.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes only.
Disclosure: I am long GFA, LDK, HIG, BWS, AXL.