10 Undervalued Stocks Searching For A Long-Term Bottom

by: Hedgephone

Many of the following names are magic formula stocks. Others on this list simply appear to be undervalued because of low Price to Earnings ratios, strong balance sheets, strong business prospects, strong ROE and Net Margins, etc...

Investors should remain fully to partially hedged in our view because the stock market has not been able to rally in any consistent fashion since 2008 without aggressive monetary stimulus measures (IE without QE, stocks could be punished).

That being said, many undervalued names look to be decent buying opportunities at current valuations. The following list is purely for your own due diligence and research and is not a recommendation to buy these names.

Oshkosh Corporation (NYSE:OSK) has been crushed because of the fears of government spending cuts on military and defense budgets which fuel OSK's revenue and profitability. OSK is a cheap stock with a price to operating cash flow of only 3-4X. OSK also provides investors in oil and gas names with a decent hedge given their historical inclusion in the transportation sector. However, with the increasing share of the company's defense business, OSK is less of a trucking business today and more of a defense company. Nevertheless, in our view the discount valuation provides more than enough margin of safety.

Petrobras (NYSE:PBR) is a cheap name at just 6.5X trailing earnings and trading for a slight discount to book value. The company has been pounded since it struck the deal with the Brazillian government, however, I think the stock trades for an unreasonably cheap multiple given the long term prospects for the price of oil (which is higher) and the company's vast reserves of black gold. Eventually, the market will catch on to the fact that PBR is trading for a huge discount and the shares will rally sharply -- at least that's my take on this undervalued titan of the oil business.

HP (NYSE:HPQ) might be a Dinosaur or even the next Kodak if you listen to the bears, and it's sad to see the company trying to sell Compaq, which in my view was HP's biggest and best asset. Having been the low price leader in laptops there for a while, the move out of the growing tablet and PC business strikes me as downright bizarre. In any event, HPQ shares are dirt cheap at 4.5X earnings, but investors need to be wary of the next stupefying moves in the C suite. Like Research In Motion (RIMM), the time to buy these names is when they are so low that everyone thinks they will hit zero. At that point you can buy the name for a nice 50% gain if you dollar cost average into the selloffs and add when the worst of the pain hits the common shares. RIMM was a tough buy at $22 but less than a month later it's back to $31 or so -- lesson learned, it pays to take small flyers in these cheap tech names and add on weakness.

Berkshire Hathaway (NYSE:BRK.B) is the best company on the planet managed by the best business manager in the world. Buying shares alongside Buffett makes a great deal of sense to me, and I expect BRK.A to be a better bet than the banking stocks for the next few years, even though the banking sector could well turn right around and reverse this year's painful losses. I am not holding my breath here on banks because derivatives are truly "financial weapons of mass destruction." Berkshire Hathaway trades for a slight discount to a growing book value and a reasonable 14X earnings. The stock is a diversified play on a U.S. economic recovery and management that is second to none.

Gilead Sciences (NASDAQ:GILD) is a biotech stock that has the earnings power and valuation of a blue chip, and the growth trajectory of a high beta web 2.0 story stock all wrapped up into one investment idea. The company's A.I.D.S. drugs and potential cure have had some rocky moments over the past year, but over the longer term I think this company will continue to innovate and outperform the markets. GILD shares are cheap at 11X earnings and 8.5X forward earnings estimates when considering that the stock has handily outperformed the S&P 500 index over the past 20 years, and the business is capitalizing on the growing healthcare markets which should continue to grow at an 8% or so clip over the next 10 years.

AIG Bruce Berkowitz is having a rough year of it so far in 2011, but counting out the Morningstar Manager of the decade after a 25% drawdown is quite premature at this point, and the man may be dead right on his financials call. Berkowitz's largest position is in shares of AIG which trade for less than half of book value and for a trailing price to earnings ratio of around 5X. AIG is certainly not without risk, and given that the government wants out of this name and is the company's largest shareholder, we would not be surprised to see continued near term volatility in the stock. That said, at such a cheap price the name might be a great longer term buy for investors with a penchant for dirt cheap names in hated industry groups at present levels.

Goldman Sachs (NYSE:GS) is certainly a stock and a company that everyone loves to pick on right now, but Goldman is the class bully in a room full of snotty nosed kids when it comes to sales and trading and investment banking services. Counting out this best of breed bankster would be foolish at this point, and we think the shares are oversold here, though the Europe situation is worsening and should be watched closely. GS is trading for a nice discount to book value, though earnings visibility is low given the uncertainty in the financial system.

Kindred Healthcare (NYSE:KND) is now trading for around 50% of tangible book value and we don't think hospitals will be going away any time soon. While the downgrade of the S&P 500 hit healthcare REITS hard, we can't figure out why this hospital owner was sold off so sharply in sympathy with that sector move. While we love this name, we recognize there are risks in the group and that we will need to conduct more due diligence on the business and the regulatory environment before making this a conviction buy recommendation.

Intel (NASDAQ:INTC) shares were back under $20 recently, which makes the name dirt cheap at current levels with a price to earnings ratio of just 8.8X and a forward PE of 7.8X or so. Just because a stock is cheap does not make it a good buy, but we think the management of Intel is second to none and that growth in the top line can eventually translate into bottom line growth for this processor company. Though analysts see the processor market slowing rapidly in the near term, we think INTC is a good longer term play on the technology market and would long INTC, MSFT, HPQ, GOOG, SNDK etc... against a short call option position in QQQ or even against a slightly in the money leap QQQ put for a more "bulletproof" type of hedge. Currently, investors can buy INTC for around $20 and sell the September $20 call options against their stock for a nice risk adjusted gain.

SanDisk (SNDK) has been creamed in the August sell off, but shares are now trading for under 8X trailing earnings and under 9X forward earnings and we think the stock is priced handsomely for a small position in the name as a value play. SanDisk is a flash drive company that is treated like a disk drive company. SNDK has proven to be a strong growth business in the past, and the company's top line could outperform analyst expectations in the coming years. A member of the Magic Formula Screen, this name offers investors a nice margin of safety at current levels. For a better entry price, consider selling the leap $35 SNDK put options instead of buying shares directly.

Disclosure: I am long KND, PBR, MSFT, INTC, SNDK, GILD, HPQ.