These Stocks May Double After Bernanke's Bedlam, Jeremy Siegel's Forecast

 |  Includes: AAV, AXU, F, MDT, SVM, T, USB, WFC, XLF
by: Marc Courtenay

Gold rips through the $1,900 level like a knife through a paper ceiling. Demand for oil is floundering and is the latest excuse for a sharp drop in oil prices (coincidentally right after the Labor Day weekend in the U.S.) hitting $83-a-barrel.

Stocks plunge in Italy and Italian bonds dropped for an 11th day. As this week unfolds the cost of government and bank default insurance in Europe rose to record levels on concern debt crisis will worsen.

“Sovereign risk-related events remain the main market drivers,” Markus Ernst, a strategist at UniCredit SpA in Munich, wrote in a note that was posted on Bloomberg's web site. "The negative is unlikely to change for the better in Europe.”

The Euro STOXX 50 Price index was down over 5% on Monday, and the one year chart looks atrocious.

One-Year Chart for EURO STOXX 50 Price EUR (SX5E:<a href='' title='ING GROEP N V'>IND</a>)

And between and September 21st, the Federal Reserve Open Market Committee (FOMC) will be preparing their next move while remaining very inconspicuous till the 21st.

My sense is that Dr. Bernanke and his "team" are hoping that all hell will break loose on the headlines of the financial news media in the U.S. This will set the stage for the next drastic "intervention" that will most likely be timed to "save the day".

I refer to this as "Bernanke's Bedlam". Bedlam is defined in The American Heritage Dictionary as "a place of noisy uproar and confusion".

That, according to all the sources I monitor, is what Wall Street and the "purveyors of financial headlines" seem to be creating at the present moment with the "European financial fiasco" as their main focus.

As an ominous portent of things to come (small cap stocks falling first and hardest), let's look at a 6 month chart of the iShares Russell 2000 ETF (NYSEARCA:IWM) along with the 50-day and 200-day moving average lines which experienced a "death cross" in late August.

Chart foriShares Russell 2000 Index (<a href='' title='iShares Russell 2000 ETF'>IWM</a>)

The low of the Russell 2000 index (hit recently on August 22nd) looks like it's about to be retested, and it's likely to happen within the next 3 weeks.

Yet in a recent interview, distinguished Wharton School professor and Wisdom Tree Senior Investment Advisor Jeremy Siegel, based on current earnings projections, said "I like stocks very much," and went on to say "Stocks are 25% to 30% below what I'd call 'fair market value' and that might be conservative in terms of earnings power and relative interest rates." You can listen to the interview here.

"Here I come to save the day", may be uttered by the Fed Chairman just in time to stave off a horrendous "death plunge" in the stock market averages in the U.S. and Europe.

The "wee people" (aka the small investor), as they say in Ireland will shout back "hurry and pull out all the stops to save the economy!" A massive bailout is imminent. When the next version of some sort of "QE3" is announced the levels of investor panic and deep losses in consumer confidence will border on the hysterical. Then the universal S.O.R. (sigh of relief) will be heard around the world and stocks will soar upward like fireworks on a dark summer's eve.

"Two things are infinite...", said Albert Einstein, "..The universe and human stupidity; and I'm not sure about the universe."

My feeling is that the Federal Reserve and the Federal politicians in the U.S. and Europe are counting on the same kind of human stupidity to inflate our economies back up to their comfort zone and to have "free reign" to inflate monetary policies.

As I'm writing, I'm looking at a list of stocks almost as long as my arm that will likely be tanking in the next few weeks only to snap back sharply (like a large rubber band that has been pulled to the extreme).

Three examples of stocks that could double off these lows in the months ahead, especially if their share prices test recent lows, are:

  1. Alexco Resources (NYSEMKT:AXU), a Canadian company which primarily explores for and produces silver, lead, zinc and gold ores, primarily in the Yukon Territory. The company also provides consulting and project management services in respect of environmental permitting and compliance, and site remediation and reclamation in Americas, primarily in Canada and the United States. AXU delivered impressive silver production numbers last month, and they excellent "discovery potential" in the months ahead. By the next "mania phase" of silver and gold, this company could have a chart that looked like Silver Wheaton's (NYSE:SLW) between the spring of 2009 and December 2010. Study their impressive web site (where they call themselves"Canada's Only Primary Silver Producer") here.

  2. Advantage Oil & Gas (NYSE:AAV), a Calgary, Alberta based company that engages in the acquisition, exploration, development, and production of oil and gas in the provinces of Alberta and Saskatchewan, Canada. It primarily focuses on exploiting and developing the Glacier property covering approximately 77.75 net sections of land located in Alberta. The company produces and sells crude oil, natural gas liquids, and natural gas primarily through marketing companies. This is a more risky investment, but as of their most recent quarter they declared a "book value" of $7.82 per share. If one buy these shares near the August 22nd low of around $5.15 to $5.20 that would mean the book-to-price ratio would be well below 1 (approximately a .66 ratio). According to an inference in "The Wall Street Transcript" which has published its 2011 Global Energy Review, companies like AAV with properties like the Glacier in Canada to produce on and selling well below book value could easily be consider takeover targets. See what AAV as a company says about themselves and recent developments here. With some unexpected good news or even rumors of being on an acquisition target list, this is a company whose shares could double over the year ahead.

  3. Silvercorp Metals (NYSE:SVM), a "buy the rumor" story, and one that has opened the way for a very cheap entry price. As reported last Friday in the Wall Street Journal:

    Silvercorp Metals Inc., a silver miner active in China, moved quickly Friday to deny allegations of accounting fraud against the company contained in an anonymous letter. The Vancouver-based company, which said it is China's largest primary silver producer, received a copy of an anonymous letter sent to the Ontario Securities Commission and others alleging a "potential $1.3 billion accounting fraud.Silvercorp said the allegations contained in the letter—including that the company misstated its profit for calendar 2010 and overstated its financial position and the grade of its deposits—are all false. Other companies active in China have been targeted...

    Silvercorp immediately responded with a press release which clearly stated that there was some massive short-selling manipulation behind the allegation. The release stated that the company

    ...announces that there has been a dramatic increase in the short position of its shares over the past two months which is now approximately 23 million shares [source: here], or 13% of the total outstanding shares.

    Read the whole press release for yourself, but if these allegations don't "hold water" there is a significant chance that a "short-covering squeeze" could at some point drive share prices of SVM dramatically higher.

    Silvercorp is engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada. Silvercorp is the largest primary silver producer in China through the operation of the four silver-lead-zinc mines at the Ying Mining Camp in the Henan Province of China.

    The company is developing its GC silver- lead-zinc mine in the Guangdong Province and recently acquired the BYP gold-lead-zinc mine in Hunan province. In Canada, Silvercorp is preparing to apply for a Small Mine Permit for the Silvertip high grade silver-lead-zinc mine project in northern British Columbia to provide a further platform for growth and geographic diversification.

    SVM pays a dividend which based on the most recent share price is over 1%. Again, IF the allegations prove to be false and a massive short squeeze occurs along with the price of silver staying above $40 an ounce, the stock price's upside potential may be exponential.

    Each of us must weigh the pros and cons, but the risk-reward potential here appears to be enormous. Do your due diligence by careful evaluation of the content on the company's web site here.

By the time the FOMC and Dr. Bernanke reveal their emergency plans on September 21st, some large cap companies like AT&T (NYSE:T) - which has over $8 billion in levered free cash flow and pays a 6% dividend - and Medtronics (NYSE:MDT) - which happens to be one of the most successful manufactures and sellers of device-based medical therapies worldwide - could also become extremely undervalued.

If the share price of MDT falls to or below $31 a share, it would be selling at less than 9 times next year's earnings and have a dividend yield of over 3%. That's a heck of lot better yield than a 10-year Treasury (currently yielding below 2%).

MDT has many medical device segments that generate billions in revenue and a profit margin of over 19%. They're involved in a "post-approval study" of Endurant AAA Stent Graft System for the treatment of abdominal aortic aneurysms (AAA). It's an example of the rich product pipeline this company has going for it (see here).

Companies like T and MDT won't be doubling in price anytime soon, but a 30 to 40% price gain from their recent or soon-to-be-attained lows is a distinct possibility.

Other large cap stocks with some huge upside potential are Ford (NYSE:F) and some of the better managed, better capitalized bank stocks like Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB).

In case you want to take a "flyer" at an really undervalued sector, try the Financial Select Sector ETF (NYSEARCA:XLF) which is nearing its 52-week low and, by some analysts estimates, could rise over 50% if the FOMC saves the day and "buys away!"

If Dr. Bernanke doesn't "balk" during the current bedlam and Dr. Siegel is correct about the stock market becoming "cheap" and ready to become even cheaper, we may look back a few months from now at these companies/sectors at these prices and wish we could have taken advantage of a rare, very lucrative opportunity.

Disclosure: I am long AXU, AAV, SVM. I may initiate a long position in the following over the next 72 hours in MDT, T, F and XLF