With the stock market continuing to unwind from a QE3 premium (QE never came), renewed sovereign debt risks from Greece, Italy, and Spain, and tighter credit regulatory requirements, a number of great American brands sold off. Companies that will rebound from the ongoing sell-off have the following characteristics:
- Growing competitive advantage
- Stable to growing sales
- Healthy balance sheet – book value per share
- Excessively low valuation – P/E under 10
- Strong leadership and management
The American brands that strengthened themselves after the last recession also meet the above characteristics:
Ford Motor Company (F): Trading at a P/E of 6.2, Ford is facing turbulence from the UAW. The contract deadline is on September 14th. After generating $14.3B in profits since 2009 and paying its CEO a well-deserved $26.5M in 2010, the company needs to keep its costs down. The company benefited from a slow-down with Honda Motors (HMC) and Toyota (TM) due to the earthquake disruption in Japan earlier this year.
Dell Computers (DELL): Dell trades at a P/E of 7.61. Shares dropped from a high of $17.60 even after reporting strong earnings. The company quietly dropped its Streak 5 tablet, offers an enterprise software play for investors, and will see stronger margins for its PC business largely due to Hewlett-Packard’s (HPQ) serious missteps.
Micron Technology (MU): Micron Technology manufactures memory (DRAM) and NAND flash memory. Trading at a P/E of 8.70, the stock failed nearly 4 times to break $12 in 2011. Memory spot prices are deteriorating rapidly, so the forward P/E is expected to rise. However, memory prices will stabilize, offering a strong return for investors in Micron. Finally, a lawsuit on Micron by Rambus is depressing share price which, when resolved, should provide investors with an entry point in this semiconductor company. Stocks that fail to meet the above characteristics but impact the value of the above companies are:
Bank of America (BAC): The great Warren Buffett invested $5 Billion after the company was reviewed as a “sell” on August 23 and traded at $6.30. After rallying to $8.39, it recently closed at $7.25. Investors concluded that the Bank of America is only a great buy for Buffett and if anything, investors should be buying Berkshire Hathaway (BRK.A), not this company that is being sued by the government. Further, BAC sold a portion of a Chinese bank for $8.3B in proceeds. It is contemplating issuing a “tracking stock” for the prized Merrill Lynch. The last time a large American company made such a move was a company called WorldCom, now bankrupt.
Citigroup (C): Trading at a P/E of 8.78, Citi peaked at $51.50 but has dropped to $28.40. The bank is one of many companies being sued by the government. Citi’s situation is not as dire as Bank of America, but shares will remain depressed due to growing regulation in the financial sector squeezing margins. The company also faces the possibility of stiff penalties.
Hewlett-Packard: Trading at a P/E of 5.71, HP is still a ‘Sell.’ HP is exiting a business – hardware - it knew well but performed poorly, and bet the company on software. HP has no experience in the software business.