In an effort to identify trading opportunities in stocks that are both undervalued and trade at low share prices, this article looks at six stocks that have fallen below $20 per share and are very cheap. Each name is subject to various idiosyncratic risks, but each meets the two mentioned criteria and is worth careful analysis and consideration. While each trade name may have a different expected duration until the profit objective is achievable, overall these should be considered medium to long-term ideas.
Ford (F): The recent sell-off in Ford, pushing the stock to nearly $12, presents an excellent buying opportunity for investors. While the decline is driven by the dual forces of the overall market and the correct fear that the looming debt crisis will have a bullish impact on oil, and therefore gas prices. However, under the stewardship of Alan Mullaly Ford has reduced its debt and improved its product line significantly.
Offering a full line of cars that actually appeal to consumers and address fuel economy concerns, the effect of the price of oil may prove to be muted. In terms of financial metrics, if the stock’s price rose to an industry average P/E based on historic earnings, fair value is in the low $20’s per share. Once growth features are included, considering discounted cash flows to the company based on expectations, the stock should be trading near $30. The most likely catalyst for a price spike is the end of the debt crisis, which may signal economic stability, allowing the favorable price action.
Fifth Third Bancorp (FITB): As has been the case with most financials heading towards the deadline on the debt ceiling, Fifth Third has been hurt by the general uncertainty facing the U.S. economy. Coming off a strong earnings report where the bank beat estimates of 27 cents, reporting 35 cents, and turned in the strongest bottom line since 2007, FITB looks strong moving forward. Most notably, the company showed unannualized sequential growth in tangible book value signaling a strengthening base.
The report also indicated positive trends in the bank’s credit situation, which should translate into a favorable position under expected regulatory reforms. In terms of a catalyst to drive the stock to the predicted $30 price target, the resolution of the debt crisis is expected to be positive for all companies in this sector. Increased uncertainty has driven down prices, but when an agreement is reached, these stocks should reverse sharply and FITB will be a leader in that group.
TD Ameritrade Holding Corporation (AMTD): Heading into a unique landscape for the retail investor, AMTD is poised to take advantage. With a sub-$20 price, there is significant upside to this stock coming out of the debt crisis. While the looming disaster has had a negative impact on financials in general, the company reports increased trading activity as its clients move to adjust their accounts.
Trading at a discount to both Schwab (SCHW) and ETrade (ETFC) on a P/E basis, the stock has room to run – particularly when further color is given to the possible acquisition of ETrade (ETFC). Once growth assumptions are included, either outright or on a PEG basis, the company looks even more attractive, and undervalued relative to its peers. On a technical basis, the end of the crisis may be the catalyst needed to break the $22.50 resistance level and allow the stock to run to $30 or higher.
Barclays PLC (BCS): As major financial institutions continue to shack things up, making major cost savings efforts and slashing budgets, Barclays represents a value within the segment. The stock is trading on a trailing P/E basis at a deep discount to its peers (BCS is trading at a P/E of 7.8 relative to Deutsche Bank (DB) at 12.5 and HSBC (HBC) at 13.6). On a straight P/E basis, if BCS were to trade in line with industry averages, fair value would be in the $28 - $32 range. Given the uptick in deal making, BCS should receive an additional boost to its bottom line.
For example, the firm just brought in over $6 million for its role as co-lead underwriter of the Dunkin’ Brands (DNKN) deal. General consensus is that investment banking business should continue to grow in the next few years; this will provide some offset to potential tightening in the consumer credit markets which are expected from both Dodd-Frank and in response to the debt ceiling issue.
Aviva PLC (AV): Trading at a trailing P/E just above 8 and a price just above 13, AV looks cheap at current levels. On a simple adjusted basis, if the price would rise to reflect an industry average valuation, investors could expect a 50% pop in the price of the stock.
Another reason to give this stock a closer look, and why a price target about $30 is appropriate in the longer-term is the global exposure element. Dollar weakness, again driven by the threat of U.S. debt issues, has contributed to negative price action for this issue. However, over the longer-term as the interplay between the company’s various regional influences clarifies and resolves, the underlying strength on the financials should play out favorably.
UBS AG (UBS): Trading at the lowest trailing P/E amongst its peers (UBS has a trailing P/E just over 7 relative to most of its peers trading in the low teens), UBS is trading at a discount and represents a great opportunity at current levels. Using only an evening out on this basis as a value metric, the stock looks to have a fair value of $30 or higher. In addition, the company continues to build an impressive management team, recently announcing the hiring of a former Bank of America (BAC) securities chief to act as co-head of global securities and head of the Americas.
Rounding out an already solid team, the move shows the company’s ongoing attention to building its global presence, and reversing the talent bleed that occurred during the economic crisis. With similar catalysts that will affect most financials, when the mispricing in this name is more widely recognized, it is like to rapidly return to fair value. We think UBS is a better bet than JP Morgan (JPM), Citigroup (C) and Morgan Stanley (MS) due to its valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.