The market surged in a volatile session Friday 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, Wyo.
Bernanke said the Fed will meet for two days in September, instead of the one day planned, 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 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, 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 at least into mid-2013, 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 seasonal sell-off is no myth; it’s a proven fact. The market’s seasonality -- 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 in 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 have dropped by nearly 50% from their 52-week highs and are primed to rebound due to a reversion to the mean, if nothing else.
The mean reversion strategy is based on the mathematical premise that all prices will eventually move back towards the mean or average return. Thus, if a stock is underperforming, its price will move towards its average value when the market rebounds. Many of these stocks have been taken down in sympathy with the global market sell-off or due headline risk. When the market recovers, I expect these stocks to experience a significant rebound.
These seven stocks are trading below $10, down an average of 42% from their 52-week highs, and have positive catalysts for future growth. Moreover, most of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments. Below is a table with detailed statistics regarding each company’s current information, 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. 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: Advanced Micro Devices, Inc. (NYSE:AMD), Bank of America Corporation (NYSE:BAC), Frontier Communications Corporation (NYSE:FTR), Southwest Airlines Co. (NYSE:LUV), Micron Technology Inc. (NASDAQ:MU), Sprint Nextel Corp. (NYSE:S) and Xerox Corp. (NYSE:XRX).
Current Performance Statistics (Click images to enlarge)
Advanced Micro Devices, Inc. operates as a semiconductor company in the United States, Japan, China, and Europe. The company is trading significantly below analyst estimates. Advanced Micro has a median price target of $8 by 28 brokers and a high target of $12. The last up/downgrade activity was on Jul 22, 2011, when Canaccord Genuity upgraded the company from Hold to Buy.
Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally. The company is trading significantly below analyst estimates. Bank of America has a median price target of $14 by 25 brokers and a high target of $21. The last up/downgrade activity was on May 4, 2011, when UBS initiated coverage on the company with a Neutral rating.
Frontier Communications Corporation, a communications company, provides regulated and unregulated voice, data, and video services to residential, business, and wholesale customers in the United States. The company is trading below analysts' estimates. Frontier has a median price target of $8.50 by 15 brokers and a high target of $10. The last up/downgrade activity was on Mar 16, 2011, when Stifel Nicolaus upgraded the company from Hold to Buy.
Southwest Airlines Co. operates as a passenger airline that provides scheduled air transportation in the United States. The company is trading below analysts' estimates. Southwest has a median price target of $13.50 by 14 brokers and a high target of $25. The last up/downgrade activity was on May 9, 2011, when Dahlman Rose upgraded the company from Hold to Buy.
Micron Technology, Inc., together with its subsidiaries, engages in the manufacture and marketing of semiconductor devices worldwide. The company is trading below analysts' estimates. Micron has a median price target of $10 by 24 brokers and a high target of $18. The last up/downgrade activity was on Aug 5, 2011, when Oppenheimer initiated coverage on the company with a Perform rating.
Sprint Nextel Corporation, through its subsidiaries, offers wireless and wireline communications products and services to individual consumers, businesses, government subscribers, and resellers in the United States, Puerto Rico, and the U.S. The company is trading below analysts' estimates. Sprint has a median price target of $5.60 by 27 brokers and a high target of $12.60. The last up/downgrade activity was on Jul 26, 2011, when RBC Capital Markets upgraded the company from Sector Perform to Outperform.
Xerox Corporation engages in the development, manufacture, marketing, service, and finance of document equipment, software, solutions, and services worldwide. The company is trading below analysts' estimates. Xerox has a median price target of $12 by 9 brokers and a high target of $15. The last up/downgrade activity was on Feb 23, 2011, when Standpoint Research upgraded the company from Hold to Buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.