In this article, we will discuss the following stocks: AK Steel Holding Corporation Co (AKS), Micron Technology, Inc. (MU), Cisco Systems, Inc. (CSCO), Ford Motor Company (F), Corning Incorporated (GLW), Masco Corporation (MAS) and Advanced Micro Devices, Inc. Co (AMD).
I believe the stocks covered 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 catalysts emerges. What's more, most of these stocks are trading well below consensus analysts' estimates, have recent upgrades, positive analyst comments and some pay dividends. Nevertheless, they have run up quickly in the New Year. With the recent downgrades of European sovereigns and the lackluster report from JPMorgan (JPM), I have taken profits and I'm going to the sidelines for now.
I wrote a couple articles at the end of last year stating these seven stocks have significant upside and it looks like a majority of them are already well on their way. The seven stocks are up an average of 10% 13 days in into 2012. This significant move in such a short time leads me to believe they may be setting up for a sell off. A majority of the stocks discussed in this article were big losers in 2011, nevertheless, are at the top of the leaderboard regarding 2012 performance.
2012 Performance Chart
Most of the stocks on the list were significant underperformers in 2011 but are up significantly this year. Topping the list is Micron, with a 15% gain since the start of the year, followed by Ford at 12%. Both stocks were down significantly in 2011. The others were down in 2011 meaningfully as well, and are already up from 4% to 11% for 2012. This may be due to a phenomenon known as the January effect. The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive, sell stocks for tax reasons at year-end (such as to claim a capital loss) and reinvest after the first of the year. Another cause is the payment of year-end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices.
The market seems to have taken the European downgrades in stride, but this was a similar reaction to the downgrade of the U.S. by the S&P. Rumors were swirling on Friday an imminent downgrade was coming on but it was Monday when the markets took a huge tumble. What's more, the euro is sure to start selling off and dropping lower, driving the dollar higher which is a huge negative for U.S. multinationals, acting as a tax on profits. On top of all this, here comes Greece again. Recent reports are stating Greece may not agree to the most recent austerity package and may have a hard default after all. The prospects of a debacle of this nature have not been priced in. The Greece issue was supposedly wrapped up.
I am not sure what will transpire but I do believe the eurozone crisis will maintain its number one spot as the biggest risk for these stocks 2012. The European Financial Stability Facility (EFSF) will start incurring additional interest expenses once the downgrades are implemented. If Greece does not get a deal done by next week the EU will be out seven billion euros more than the seven they already negotiated away. This will cause the European markets to sell off steeply in the near term.
The recent downgrades may provide an opportunity to buy back in on the dip. We have already seen several examples this year where the U.S, market's reaction to eurozone issue headlines has been somewhat mooted, underpinning the thesis that the U.S. market is decoupling from European markets. But the world markets are comparable to ships sailing on the same sea and a storm of sufficient magnitude will sink all vessels. It is time to take a defense stance for the short term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.