The ever-present ominous collapse of the European Union, along with the euro, has created significant buying opportunities in the market currently. These stocks are already under extreme pressure from potential exposure to the eurozone crisis and the corresponding macroeconomic ripple effects.
Although the specific vulnerability to the eurozone calamity of these stocks is in dispute, the stocks in question have paid the price at present and are trading at bargain basement levels. The stocks are as follows: Schlumberger Limited (NYSE:SLB), Caterpillar Inc. (NYSE:CAT), News Corp. (NASDAQ:NWS), Newmont Mining Corp. (NYSE:NEM), DIRECTV, Inc. (DTV), Halliburton Company (NYSE:HAL) and National Oilwell Varco, Inc. (NYSE:NOV).
Eurozone Current Events
In a hot-off-the-presses piece by Briton’s The Telegraph, James Kirkup, deputy political editor, details how British diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis. Kirkup stated:
As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible. Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.
While Kirkup’s piece is a terrifyingly chilling tale, German Chancellor Angela Merkel and French President Nicolas Sarkozy are doing their level best to defeat the impending debacle. A report out from Reuters details a plan by the two primary leaders of the eurozone to implement a quick new Stability Pact. Reuters stated:
German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means - including a quick new Stability Pact - to fight the euro zone sovereign debt crisis, Welt am Sonntag reported on Sunday.
Moreover, in an insightful piece by CNBC Fast Money executive producer John Melloy, Melloy reveals a key player at the center of the eurozone crisis who believes worries may be overblown. Melloy stated:
Ironically, the chief U.S. economist at a company in the cross hairs of the European crisis believes investors are too concerned about a ripple effect on these shores and believes the American economy could be growing at the fastest pace in almost five years.
Monday, the market started out on a great note with a 300 point advance many are calling the “Black Friday Boost,” after a fantastic start to the holiday sales season. Interestingly, the same scenario occurred last year, and the market never looked back. Whichever way it goes, the myriad of negative headlines permeating the globe has driven many stocks to cellar-dweller status at present. You have to buy low to sell high.
I believe the negative market conditions have been substantially baked in to these stocks and the risk-reward ratio presents a significant buying opportunity as is. There may be more downside in the near future, but there is much greater upside for these stocks once the market turns - and it will - because it always does. I suggest layering in to these stocks as your risk tolerance permits.
Noteworthy Fundamental Criteria
The stocks covered are large cap or better S&P 500 stocks with Buy or better recommendations by analysts, have next year EPS growth rates of over 20% and PEG ratios of one or less. These stocks are contrarian plays that have major upside potential once the geopolitical and macroeconomic issues of the eurozone and U.S. are resolved.
Analyst recommendation Of Buy Or Better
Analyst recommendations are supposed dependable, but most investors tend to look at them with a skeptical slant. Recommendation can be changed at any time and are often early or late to the party. Nevertheless, this is the world we live in and it pays to consider this factor due to the fact many mutual funds and institutional investors use these benchmarks. Analyst recommendations vary from firm to firm but for the most part center around three categories:
- Buy: Estimated total return in excess of historic annual rate of 10%
- Hold: Neutrality predicted.
- Sell: Deleterious return anticipated.
High Projected Earnings Per Share Growth Rate
A company's earnings per share is conceivably the most important statistic to understand before investing in a 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 that 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: First, 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.
PEG Ratios Near Or Below One
The PEG ratio is a widely accepted indicator of a stock's prospective value. It is favored by many analysts over the price/earnings ratio for the reason that it also accounts for growth. Analogous to the P/E ratio, a lower PEG means that the stock is more undervalued. Many investors use one as the cut-off point for PEG ratios. A PEG of 1 or less is believed to be promising.
As Warren Buffett would say: "Price is what you pay; value is what you get." There is one caveat regarding the use of the PEG ratio though, and it’s a big one, you need to perform additional due diligence and determine if the projected growth of the company is from healthy growth sources such as organic growth versus growth by acquisition or stock buy backs, which are not necessarily bad, but may be unsustainable.
Moreover, most of these stocks are trading well below consensus analysts' estimates, have recent upgrades, positive analyst comments and some pay dividends. Below are two tables with detailed statistics regarding each company's current summary and fundamental information.
Company Summary Statistics (click tables to enlarge):
Company Fundamental Statistics
Although correlation in stocks is at an all-time high, I believe these stocks present a substantial buying opportunity and will outperform the market in 2012. I expect these stocks to experience a significant rebound based on several bullish technical indicators, the market's unending resilience in the face of continual negative headlines, the performance of S&P 500 stocks this earnings season, a bullish outside month in October, the coming resolution of the eurozone banking crisis, and the fact that many investors have been shaken out of the market by the extreme volatility this year. Once they see stocks start to take off next year, the chase will be on and the flood of money coming in from the sidelines will create a significant rally..
Answer this question: How many times has the stock market roared back after a correction? The fact is, every time. If you told someone in 1987 on Black Monday that the Dow would be almost ten-fold higher within 20 years’ time, that person would have called you crazy, but you would have been correct. Who is to say how high the market can climb from here? Fortune favors the bold, you must the courage to buy low to sell high. Nevertheless, everyone has their own risk tolerance profile; please use this information as a starting point for your own due diligence.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLB, CAT, NWSA, NEM, DTV, HAL, NOV over the next 72 hours.