Seeking Alpha
Long/short equity, tech, banks, oil & gas
Profile| Send Message|
( followers)

The market surged in a volatile session recently after Bernanke said the Fed remains ready to use additional tools to help the economic recovery, but stopped short of another round of monetary easing. The Dow plunged almost 220 points immediately after Bernanke started his speech, but swiftly recouped losses. "It is clear the recovery from the crisis has been much less robust than we had hoped," Federal Reserve Chairman Ben Bernanke said at the banking conference in Jackson Hole, Wyoming.

Bernanke said the Fed will meet for two days in September instead of the planned one day to discuss its options to provide additional monetary stimulus, among other topics. Bernanke went on to say he expects growth to pick up in the second half of the year. However, if signs of a recovery fail to materialize in the near-term, the FOMC may consider additional policy tools at its September meeting.

I agree with the “Bernanke” and I’m glad he did not succumb to the calls for QE3, which I believe was more hype than reality. When the market rallied 300 points last week, the media outlets immediately started calling it the “Jackson-hole QE3” rally. It took the following couple of days for genuine traders and investors to talk down the rhetoric and correctly state that most investors don’t expect Bernanke to state he is going to start another round of QE3 at the Jackson-hole meeting.

Why didn’t he do it? Because he already stated he was going to keep rates down for the next two years! The Federal Reserve guaranteed super-low interest rates for two more years, an unprecedented step to arrest the alarming decline of the stock market and the economy. This bodes well for stocks in general.

With the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation, driving investors into stocks in search for yield.

Moreover, I submit we are experiencing a colossal case of the "Sell in May and go away" phenomenon. The "sell in May and go away" seasonal sell off is no myth, it’s a proven fact. The market’s seasonality in addition to the established predisposition to create a majority of gains from November to May and experience the greatest amount of losses in the contrasting period is well-documented. A study by the Massey University, Department of Economics and Finance, Albany and New Zealand Institute of Advanced Study entitled “The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle” stated:

We document the existence of a strong seasonal effect in stock returns based on the popular market saying Sell in May and go away, also known as the Halloween indicator. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The Sell in May effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle.

I accurately predicted this precipitous drop in an article I wrote mid-May. I believe we are nearing the end of the correction and it’s time to start nibbling at the amazing buying opportunities created. Many stocks look really cheap and have dropped over 10%. I have culled 7 stocks from the masses that meet a strict set of screens.

These seven large cap or better S&P 500 stocks have positive catalysts for future growth, positive EPS growth rates for the next five years, positive sales growth over the past five years, are oversold per the RSI indicator and have a greater than 3% dividend yield. These are bullish indicators regarding a stock's possible future performance. Robust sales and EPS growth rates are traits of notable names.

Regarding EPS, the earnings per share of a company is conceivably the most important statistic to understand before investing in a company’s stock. Each time you consider starting a position in a stock, you should prudently scrutinize its earnings information. The reason earnings are so vital to investors is because they tell you about the relative profitability of a company.

Earnings per share is defined as the net income of a company divided by the shares of common stock outstanding. With the EPS measure, you are looking at the amount of money left over for shareholders. The value is reported after taxes are subtracted, and we are normalizing those profits by stating them on a per-share basis.

When a company is profitable, and has money to give back to shareholders in the form of earnings, the company has two basic options. It can distribute some of the earnings in the form of a stock dividend. Factor this in with the fact that historically, dividend-paying stocks have outperformed non-dividend-paying stocks, and you have a recipe for outstanding returns.

After the precipitous drop in the Dow in 2008, the high-dividend-payers were the first to recover. Whatever is not paid out in the form of dividends is placed into the retained earnings, which then become a source of capital that can be used to help support the growth of a company.

The RSI Indicator is a good tool to help identify overbought/ oversold conditions, divergences and crossovers that investors use to identify new trends in a stock. Known as the Relative Strength Index, the RSI was developed by J. Welles Wilder in 1978 to measure the relative strength of price currently compared with its price history over a set number of periods. The RSI indicator is plotted on a panel above or below the price chart. It is easy to identify the set-up as the RSI indicator shows the market’s strength compared with the historical price trend. Most traders and investors use the RSI Indicator. As a measure of overbought and oversold conditions, the RSI indicator provides investors a way to identify a security or index that is reversing direction. When RSI is above 70, it is signaling an overbought condition, indicating an investor needs to be ready to close long positions or establish downside protection. As the RSI turns down through 70, it is giving a sell signal. An RSI below 30 indicates an oversold condition, acting as a warning to the investor to be ready to buy the best set ups. As the RSI indicator rises through 30, it gives a buy signal. This is especially true if the long-term trend is up, as the RSI rises through 30, creating potential entry points.

Moreover, most of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments. Nonetheless, this is only the first step in finding winners for your portfolio. Please use this as a starting point for your own due diligence.

The seven stocks that met all of these criteria are: General Electric Co. (NYSE:GE), The Dow Chemical Company (NYSE:DOW), Time Warner Cable Inc. (NYSE:TWC), The Travelers Companies, Inc. (NYSE:TRV), AFLAC Inc. (NYSE:AFL), Sysco Corp. (NYSE:SYY) and PPG Industries Inc. (NYSE:PPG).

Below is a table with detailed statistics regarding each company’s current performance, followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity, followed by a chart of the company's key statistics.

Current Performance Statistics

Click on images to enlarge

Company Reviews

General Electric Co. operates as a technology, media and financial services company worldwide. The company is trading significantly below analysts' estimates. General Electric has a median price target of $243 by 14 brokers and a high target of $30. The last up/downgrade activity was on Jan 28, 2011, when Argus upgraded the company from Hold to Buy.

The Dow Chemical Company manufactures and supplies products used as raw materials in the production of customer products and services worldwide. The company is trading below analysts' estimates. Dow Chemical has a median price target of $43 by 10 brokers and a high target of $49. The last up/downgrade activity was on May 5, 2011, when Argus upgraded the company from Hold to Buy.

Time Warner Cable Inc., together with its subsidiaries, operates as a cable operator in the United States. The company is trading below analysts' estimates. Time Warner has a median price target of $85 by 21 brokers and a high target of $100. The last up/downgrade activity was on Jul 11, 2011, when Brean Murray initiated coverage on the company with a Hold rating.

The Travelers Companies, Inc., through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals primarily in the United States. The company is trading below analysts' estimates. Travelers has a median price target of $66 by 15 brokers and a high target of $71. The last up/downgrade activity was on Jan 28, 2011, when Argus upgraded the company from Hold to buy.

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company is trading significantly below analysts' estimates. Aflac has a median price target of $63.50 by 16 brokers and a high target of $75. The last up/downgrade activity was on Apr 18, 2011, when Barclays Capital initiated coverage on the company with an Overweight rating.

Sysco Corporation, through its subsidiaries, distributes food and related products primarily to the foodservice or food-away-from-home industry in North America and Europe. The company is trading below analysts' estimates. Sysco has a median price target of $32.50 by 4 brokers and a high target of $34. The last up/downgrade activity was on Jan 18, 2011, when BB&T Capital Markets downgraded the company from Buy to Hold.

PPG Industries, Inc. manufactures and supplies protective and decorative coatings. The company is trading below analysts' estimates. PPG has a median price target of $105 by 7 brokers and a high target of $119. The last up/downgrade activity was on Oct 13, 2010, when KeyBanc Capital Markets initiated coverage on the company with a Buy rating.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 7 Oversold Bargains Primed For A Year-End Rally