In this article, we will discuss the following stocks: Alcoa, Inc. (AA), Peabody Energy Corp. (BTU), Citigroup, Inc. (C), Chesapeake Energy Corporation (CHK), Freeport-McMoRan Copper & Gold Inc. (FCX), The Goldman Sachs Group, Inc. (GS) and Ford Motor Company (F).
The stocks covered are stocks trading significantly below their 52-week highs, by nearly 50% with the exception of Chesapeake. These stocks are speculative contrarian plays that have major upside potential once the geopolitical and macroeconomic issues of the eurozone, U.S. and the world fade from the forefront of investors' minds and a renewed focus on fundamentals and company specific catalyst emerges. Mark my words: these stocks will double in 2012.
Reversion To The Mean Phenomenon
The mean reversion strategy is based on the mathematical premise that all prices will eventually move back toward the mean, or average, return. Thus, if a stock is underperforming, its price will move toward 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 to headline risk. Stock market correlation is at an all-time high, but when the market recovers, I expect these stocks to experience a significant rebound.
Moreover, most of these stocks are trading well below consensus analysts' estimates, have recent upgrades, positive analyst comments and some pay dividends. Please review the following list of potential current company specific catalysts follow by a chart detailing each company's current fundamental statistics.
Company-Specific Catalysts and Fundamental Statistics
Alcoa, Inc. - Embraer S.A. and Alcoa announced they have signed a new technology sharing agreement that will utilize Alcoa's proprietary aluminum alloys, advanced design and manufacturing techniques, and its fastener technologies to support Embraer's development of new high-performance metallic fuselage and wing solutions for its family of aircraft.
Fundamental Statistics (Click to enlarge images)
Peabody Energy Corp. - Coal is the fastest-growing fuel in the world and is in the early stages of a long-term super cycle, propelled by significant demand growth in developing economies across the globe. Peabody is the world's largest private-sector coal company and the only global pure-play coal investment. During 2010, Peabody delivered record revenues of nearly $7 billion, driven by higher volumes and pricing from mining operations in both the United States and Australia. EBITDA rose 41% to $1.8 billion on strong cost containment and margin expansion in every operating region, leading to significant operating cash flows of $1.1 billion.
Citigroup, Inc. - Citi recently announced it has been named the World's Best Internet Bank for 2011 by Global Finance magazine. Citi was the recipient of over 90 global, regional and country awards. Naveed Sultan, Global Head of Treasury and Trade Solutions, Citi Global Transaction Services, said:
Citi is thrilled to have earned this prestigious recognition by Global Finance. We believe this is a true validation of our industry-leadership position in Internet banking and demonstrates our strength as a global organization. Winning these awards is also a reflection of our steadfast commitment to providing our clients with the best technology platforms enabling them to succeed in today's challenging business environment.
Chesapeake Energy Corporation - Chesapeake is undervalued by greater than two times its current market value. Chesapeake's intrinsic value is in the range of $62.00 per share based on all assets. A bill introduced recently in the U.S. Senate, the NAT GAS Act of 2011, would provide increased support for the movement to deploy large numbers of natural gas vehicles (NGVs) in the United States. This bodes well for Chesapeake's future. Chesapeake is currently trading at $22. CEO Aubrey McClendon was interviewed live on November 16 on CNBC's "Mad Money" with Jim Cramer. The interview covered topics including natural gas prices for winter, Chesapeake's subsidiaries and assets, the NAT GAS Act, exporting U.S. natural gas and American energy policy in the upcoming presidential election.
Freeport-McMoRan Copper & Gold Inc. - James R. Moffett, Chairman of the Board, and Richard C. Adkerson, President and Chief Executive Officer, said:
Our third quarter 2011 results reflect strong operating performance and favorable markets for our products. While the near-term economic outlook is uncertain and has resulted in a decline in copper prices over the last several weeks, the fundamentals of our business are strong and we have a positive view of the long-term market fundamentals. As we address union labor issues at our mines, our strategy continues to focus on effective execution of our operating plans, aggressive cost management and investing in projects with attractive rates of return to enhance our global portfolio of large-scale, long-lived and high-quality assets.
The Goldman Sachs Group, Inc. -The Goldman Sachs Group, Inc. recently reported net revenues of $3.59 billion and a net loss of $393 million for the third quarter ended September 30, 2011. The diluted loss per common share was $0.84 compared with diluted earnings per common share of $2.98 for the third quarter of 2010 and $1.85 for the second quarter of 2011. Lloyd C. Blankfein, Chairman and Chief Executive Officer stated:
CEO and investor confidence as well as asset prices across markets were lower in the third quarter given the uncertain macroeconomic and market conditions. Our results were significantly impacted by the environment and we were disappointed to record a loss in the quarter. However, we believe the strength of both our client franchise and our balance sheet positions us well for when economies and markets improve.
Ford - Visitors to the Ford stand at the 11th Auto Expo 2012 in New Delhi next month will get the first glimpse of an all-new vehicle planned for introduction in India and other global markets in the near future. With expected attendance of 1.4 million visitors, Auto Expo 2012 is an ideal location to showcase the newest Ford product.
This next-generation vehicle will take centre stage on Ford's high-tech and interactive stand, which will cover roughly 1,400 square meters. Highlights planned for Auto Expo 2012 include comprehensive safety and quality displays, a 3D theater, live shows and a crowd-sourced, interactive driving game.
A burst of late day selling left the markets at session lows on this last day of trading for 2012. The S&P 500 is basically flat for the year. Although flat may not be the return shareholders expected, the relative strength of the U.S. market was apparent with most of the world's major equity markets agonized with double-digit losses for 2011. 2011 was a year of exceedingly correlated and exceptionally unpredictable market performance. Nonetheless, fundamental dynamics in the long run provided some support keeping the markets afloat.
I see the eurozone crisis maintaining its number one spot as the biggest risk for 2012, although the risk is fully baked in to the market at this time. Other key factors to watch are China's economy, the 2012 U.S. presidential election, and well as geopolitical issues arising from the Middle East and emerging markets.
The 'crowd' is most enthusiastic and optimistic when it should be cautious and prudent, and is most fearful when it should be bold.
When everybody thinks alike, Everyone is likely to be wrong.
The quotes above from Humphrey B. Neill, author of "Art of Contrary Thinking," are a compelling case behind the economic booms and busts that mar the markets. The Mississippi Bubble, Holland's absurd Tulipmania and the stock market crash in 1929 are historic examples of disasters magnified and hastened by the pressure of mass opinion, according to Neill. In the years immediately following the close of World War II, ominous popular forecasts of business recession turned out to be wrong. What actually happened was a business boom, not a business bust, exactly the opposite of popular opinion.
Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you have powder dry and take advantage. The market is clearly at an inflection point. To open a position you must have courage in your convictions, just remember, fortune favors the bold. A market correction provides opportunity to buy great names at a discount price.
I believe Neill's quotes and contrarian way of thinking are quite apropos at this juncture. I posit these stocks are at an inflection point. They are trading at rock bottom prices and virtually no one on the street is recommending you buy them today. Myself and a select few believe they are about to make a major comeback in 2012.
It is hard to think beyond the current state of affairs when negative preoccupations always seem to repeat themselves and you are stuck on a roller coaster ride of continual highs and lows. The conundrum is if you are waiting for all the difficulties creating the so-called "wall of worry" to be solved prior to starting a position, you may never buy a stock. Moreover, at that time, it will be most likely too late to buy due to the fact all the savvy investors bought in and stocks are no longer a good value.
Based on several bullish technical indicators, the market's unending resilience in the face of continual negative headlines, I believe the market is setting up for a 2012 rally. Fortune favors the bold. Hopefully, you have some dry powder and can take advantage of these amazing buying opportunities.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AA, C, F, BTU, GS, FCX, CHK over the next 72 hours.