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One of my top stock picks for the early part of 2012 is Power One Inc. (NASDAQ:PWER). The company builds inverters for renewable energy, and converters for data centers. The reason this stock is slated to be one of the best stocks of 2012 is due to the current strain on Americas energy grid and the strong push for renewable energy. The company is in the right place at the right time.

Fundamentally Undervalued

The stock currently trades at $4.66, which is only 1.3x the book value of the company. So, given a worst case scenario of the company defaulting you stand to only 26% based off their tangible book value of $3.54, but after looking over the company's debt ratios it is highly improbable that the company will default. They currently operate with a Total Debt to Equity ratio of 0.1, which is slightly better than the industry standard of 0.5. Then to top of the wonderful ratios, the stock has a PEG of 0.3 - stocks that have a PEG less than 1 are typically considered undervalued.

Profitability

So, the basic building blocks of a fundamentally undervalued stock are in place, but if there is something wrong with their management then investors could simply be pricing that problem into the stock price. Interestingly enough though the company is very profitable with a Net Profit Margin of 14.10% and they currently generate 23% on their assets, 44% on their equity, and 38% on their investments and they are generating $7.92 per share. The company is very profitable and with the recent sell off it is an ideal time to buy into Power One Inc. I am watching the stock at current levels and will probably pick it up if it drops down to $4.50.

How to Trade Power One Inc

The way I plan to play the stock: Buy lots of 100 shares (to sell covered calls), and wait for the stock to pick a direction at $4.50 if the stock increases in value then I won't utilize the covered calls and will probably sell at $4.9 and buy it back at a dip.

If the stock trends lower than $4.50 then I will sell $4.00 calls one month out to profit $00.40 per share to cut my losses or to bring my cost average down to $3.6 and wait for the stock to pick back up. So, either way this play is hedged well and the stock price is close enough to book value that it would be a shame not to at least test the waters of this very undervalued stock.

Source: PowerOne: A Top Stock Pick For Early 2012