Investment Underground took a look at five stocks that are hovering around $20 that offer investors 50% upside from here. All the names below could trade for $30, in our opinion. As always, use the names below as a starting point for your own due diligence.
Cisco is another organization which has beaten analysts' estimates consistently over the last five quarters, yet it is trading at a low of $16.28 from a one year high of $24 with a P/E of 12.79. Cisco’s earning is expected to grow at a rate of 11% over the next five years. Still, investors are not happy. This is due to the fact that the decline in revenue from switching business segments does not go down well with investors. However, Cisco’s other segments are going strong and expected to be around $30 billion in the current year, much higher than estimated.
Over the last quarter Cisco spent almost $1.8 billion to buy back share at average price of $20.8 indicating that the management believes that Cisco is undervalued. Cisco has a very strong balance sheet. All its fundamental ratios like EBITDA, EV/EBITDA etc. are better than its competitors. With lots of cash, it would not be surprising if management decides to start paying dividends sometime soon.
Running the DCF model puts Cisco in the price range of $29-$33, indicating that the organization is undervalued at the current price.
They say "what doesn’t kill you, only makes you stronger." It does not apply to any organization more than Ford. Ford has seen everything from great depression to great recession. No wonder Ford knows how to survive tough times. Ford is one of the biggest automobile companies with presence in almost all countries on the planet.
At the time of writing, Ford was trading at $13.17 and has been trading well below its YTD low of $18.67, more due to concern about sluggish global economy rather than its fundamentals. Ford has been consistently paying off its debt and streamlining its operation and to top it off, it is making cars that people across the globe want.
However, with the worst behind its back, Ford’s EPS is expected to grow at 13% over the next five years. Assuming a P/E of 15 (well below the industry average of 20) and estimated EPS for 2012 at 1.96, values Ford's share at very close to $30. That's more than a 100% jump in one year. We like Ford more than General Motors (GM) at these prices.
General Electric (GE)
GE, also known as the bellwether of the economy, is a leading technology and financial services company. GE, with a presence in over 100 countries, is one the most diversified company with operations in almost every sector of the economy.
GE’s market capitalization is $193 billion and is trading at a YTD low $18.96. GE over the last five quarters has beaten the analysts' estimates by a margin of 10%. GE is trading at P/E of 14.67 and just 11.35x its 2012 EPS consensus. GE has increased its dividend by almost 50% over the last two years. GE has D/E ratio of 3.68, which has been constantly decreasing over the last few quarters.
With the emerging markets driving the bulk of the economic growth over the next decade, GE’s technology segment products like wind turbines, solar panels, drilling platforms, aviation products, health care products, etc., are going to drive its growth. With the financial sector getting back on track, GE’s financial arm has been improving and is generating profit.
Applied Materials Inc. (AMAT)
The technology sector is flying high and AMAT is making the most of it. It is currently trading at $13.08 with a market capitalization of $17.26 billion. The company has been getting richer with cash increasing last quarter to $3.3 billion, representing a 20% rise over the sequential quarter and at the same time, the company has a very strong balance with a low debt/equity of 0.03
AMAT’s P/E at the time of writing is 11.03 and the forward P/E with estimated EPS for 2011 is even lower at 9.21, and the organization is trading at an estimated P/E of 9.4 for 2012. Its earnings are expected to grow at 9.50% annually over the next five years.
With increasing cash balance, it's a very likely buyout target in the next couple of years or the management will increase the dividend growth rate. With all these factors, the investment community is going to start rewarding the organization soon, driving the prices up.
Pfizer is a pharmaceutical company involved in the research and manufacturing of prescription drugs. It is a globally diversified company with its products in every country on the planet. Pfizer, with $68 billion in revenue for 2010, is the world’s biggest pharmaceutical company with products like Lipitor and Viagra.
In 2010, Pfizer's EPS was $2.23 in adjusted earnings per share and currently is trading just under $20.
The pharmaceutical industry is expected to grow at 4-5% over the coming decade. With the estimated EPS for 2012, the organization is trading at a P/E of 8.9.
A very conservative level using the discounted cash flow model and using the estimated earnings growth over the next five years gives Pfizer a share price of $33.
It seems that the investors have been overshadowed by the concern of the patent expiration on Lipitor. However, the fundamentals of Pfizer are very strong and the company’s stock price does not correlate to its strong fundamental, making it a strong investment opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.