Since its start, the year 2011 has been eventful to say the least. After gainful last two years when major US indices clocked handsome expansions by virtue of the low base effect of 2008 levels and multiple stimuli measures by the Federal government, the current year started on a solid footing supported by the second round of Quantitative Easing [QE], witnessing an average 6% rise in all three major indices: Dow (DIA), Nasdaq (QQQ) and S&P 500 (SPY). However, the tides turned in the second quarter (and beyond) as continuous weaknesses in the economic data, appalling political impasse on the debt ceiling issue, turbulent eurozone debt crisis and resultant fear of a financial contagion perturbed the investors’ sentiments and resulted in a heavy sell-off in the international markets in general and US markets in particular.
While the ambit of sell-off was market-wide, it meant different repercussions for different stocks. We have identified 5 stocks which, having even eye-catching levels before, have only become more attractive as a result of this sell-off.
General Electric (GE)
General Electric (GE) is perhaps one of the most diversified conglomerates of the world with its reach spanning numerous domains like infrastructure, technology, energy, media and financial services. However, since the start of April 2011 the stock has been battered , surpassing the Dow Jones Industrial Average (^DJI) by a whopping 12 percentage points in terms of share price reduction. This movement has landed the stock at attractive levels and upside potential can be noted based on several reasons. With a “usual” earnings per share of $1.15 in 2010, GE is all set to meet strong average growth of around 20% in its earnings for each 2011 and 2012. This results in a sizeable 24% discount to its industry in terms of forward price earnings ratio. Also, the stock has considerable potential in attracting dividend-savvy investors with a history of consistent dividend stream and higher net margins, better dividend yield and superior price book ratio than its closest competitors like Siemens (SI) and Caterpillar (CAT).
Cisco Systems, Inc. (CSCO)
Cisco Systems, Inc. (CSCO) is one of the largest companies in the global technological landscape specializing in advanced networking, telecommunication and information technology equipment. During the last two years, the stock’s direction has pointed south with subtle topline growth and an almost flat bottom line. However, such sag in the stock’s price has caused a favorable impact on its valuation, especially from the perspective of an alpha (return) seeker. In the backdrop of improvement in its fundamentals after dividend payments started in 2011, CSCO currently trades at a substantial 50% discount to its industry both in terms of its price earnings multiple and its price book ratio, which is enticing considering its legacy of a relatively low risk profile and stable revenues.
Pfizer Inc. (PFE)
Pfizer Inc. (PFE) is the world’s largest drugmaker and sells the world’s best-selling drug, Lipitor, which comprises almost one-fifth of its total sales. However, with Lipitor’s patent expiry just round the corner (November 2011) and the company’s desperate attempts to find new avenues of growth through organic (new drugs and generic copies of its own drugs) and inorganic means (acquisition of Wyeth), PFE has lost its luster in the eyes of investors. The stock was punished by its recent financial performance, where, despite a substantial rise in its revenues, the company's earnings have remained flat. The month of August has been the most troublesome for the company as the stock has lost more than 13% of its of value in the first sixteen days of trading. Then again, I believe that even if the growth opportunities in PFE’s operations currently appear nominal, the current level of the stock is clearly unjustifiable as it is trading at a steep 55% discount to its industry on the basis of earnings capitalization and 35% discount to even its closest competitors, Johnson & Johnson (JNJ) and Novartis (NVS).
Intel Corporation (INTC)
Intel Corporation (INTC) is the world’s largest semi-conductor chipmaker and producers of almost every second computer processor in the world. Being a company that has grown from strength to strength, INTC has a history of pioneering new technologies, gaining first-mover advantages and sound business prospects. This reflects in its financial performance and its stock price performance which has shown close movement around its mean during the past two years with consistently growing dividends and a more-than-reasonable current dividend yield of 4.4%. However, the stock price fell prey to the deteriorating investor sentiment in August 2011 when it shed almost 12% of its value during first three weeks of the month. With 2012 earnings growth expectations of more than 15% and better-than-industry net margin and ROE, INTC currently trades at an attractive 37% discount to its industry in terms of price earnings multiple and a discount of 49% and 18% to its industry and closest competitor AMD (AMD), respectively, in terms of price book ratio. This is despite having a massively lower leverage on its balance sheet on comparable basis.
Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is one of the largest drug manufacturing companies in the world with revenues in excess of $60 billion and is regarded as the most respected company in the United States for “corporate reputation” as gauged by its number one position in the Harris Interactive’s (HPOL) “National Corporate Reputation Survey. JNJ is the only company in our selection which has been able to weather the recent stock market turmoil and coming out almost untouched. Considering the company’s recent financial performance, it becomes obvious that in addition to its reputation as the world’s most respected company (as ranked by Barron’s Magazine), JNJ also has a knack of finding innovative opportunities to enhance its bottom line as despite having a flat top line during the last four years, the company posted a compound annual growth rate of 8% in its earnings. In the backdrop of a notably higher ROE than its industry (20% vs. 16%), the stock currently trades at a 30% discount to its industry on the basis of price earnings ratio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.