The purpose of this series is to look at eight stocks that are presenting the most upside in the market by a number of factors. In part 1 we looked at the bottom four and in part 2 we will be looking at the top four stocks with upside of at least 110% through the remainder of 2012. What makes this impressive is that most of these stocks were beaten down during the last 6 months of 2011. They have posted large gains YTD and are still presenting significant value. These top four stocks are likely to return incredible gains and are significantly cheap according to fundamental growth and current valuation.
- Bank Of America (BAC)
Opinions surrounding banks aren't too high these days -- especially when we are talking about Bank of America. Yet the truth is, Bank of America is significantly undervalued if you remove the fear and focus on its fundamentals. The stock has been one of the market's biggest gainers YTD with a 27% return, however the stock is still trading with a mindboggling 50% loss over the last year. With such loss you would think that earnings are declining and guidance is weak. However, the company just reported net income of nearly $2 billion compared to a loss of $1.5 billion year-over-year during its most recent quarter as well as revenue gains of 17.6% during the same period. Therefore, some may suggest that BofA is improving and that it should be trading with a yearly gain instead of a loss.
BofA is a global company and the troubles in Europe are creating a great deal of pessimism surrounding the company's future. In addition, the company faces new regulations which could lower its long-term profits. And since company executives have chosen to lay off employees and close branches to hit bottom line expectations, it's no surprise that the company's not a favorite among investors. However, the value of this stock is non-debatable, and the stock is trading at just one-third of its book value per share. BofA has posted two consecutive quarters of net income and its troubled days of net loss appear to be past. The bank seems to have its cost issues under control, and since Europe has been in turmoil for quite some time, I am encouraged by its recent performance. Considering BofA is only trading at 5.94x future earnings, which means earnings are expected to rise, there is substantial upside in this stock.
There is no doubt that its fundamentals are better right now than at any point in 2011, which means progress is being made. As optimism continues to build, I think it will trade at prices higher than its current 52-week highs. The one year target for BAC shares is just $8.98, but because of its progress, a price of $15 isn't unrealistic; and this would still be short of its actual worth. I have never been a big fan of BofA, but I have come to the realization that you don't have to like a company for it to be a good investment, and if you look at its fundamentals, there aren't many stocks in the market worth more based on current fundamentals.
- Spectrum Pharmaceuticals (SPPI)
Spectrum Pharmaceuticals has posted a one year gain of 150%. Yet despite this, Spectrum is still by far the most undervalued stock in biotechnology. There isn't even a close second, as Spectrum is valued at $875 million and is growing at unprecedented rates. During its most recent quarter, the company grew revenue by over 200% year-over-year and posted net income of $20.25 million, compared to a loss of $4.59 million in the year prior. This level of growth exceeds all others in biotechnology, yet Spectrum trades at under 20x earnings, while others with less growth trade at much higher multiples, and companies without any approved drugs trade with higher valuations.
The closest to Spectrum's growth that I can find is Questcor Pharmaceuticals (QCOR) which posted nearly identical earnings and revenue during its most recent quarter. The only difference is that Questcor is growing at about half the rate of Spectrum but trades with a market cap of $2.30 billion and a P/E ratio of 44. To me this makes no sense but it is a chance for value investors to take advantage of the stock's cheap price.
Up until recently, investors have been somewhat pessimistic regarding Spectrum's future growth. However, its growth prospects are now more encouraging than ever, and 2012 will be a year of incredible gains. Spectrum is trading at only 20x earnings, mostly because of questions surrounding a potential generic for its fastest growing drug, Fusilev. It has also returned very modest growth for its other approved drug, Zevalin because of its cost to both the patient and physician. The good news is that both of these concerns have been answered: The company's patent protection has been reiterated for its fastest growing drug Fusilev and a bioscan requirement has been lifted for Zevalin. This will lower Zevalin's cost and encourage the use of the drug a treatment of choice among both physicians and patients. In addition, the company has two more candidates that are near an FDA approval later this year, and if so, this will create earnings growth beyond Spectrum's already industry leading rate.
Spectrum is the best stock in biotechnology. And because of its low valuation compared to growth, I expect 2012 to be particularly positive, with fewer questions regarding its future growth. Spectrum has posted a gain of 70% over the last three months and I anticipate continued gains, near this level, for the remainder of the year. It has a forward P/E ratio of 15.86, and there is no way that a company growing this fast will trade at 15x earnings. In fact, by the end of the year, Spectrum should be trading as a momentum stock.
However, the total gains of this stock are hard to predict. That's because its future ratio is most likely inaccurate because analysts have been unable to predict its earnings. This can be seen during two of Spectrum's last three reports, when the company beat expectations by 200%. Therefore, its future ratio looks likely closer to 12, rather than 16. And because of Spectrum's growth, restrictions being lifted, and two other drug candidates that will most likely be approved, SPPI will soon trade at 25x earnings, or a one year gain of near 200%.
To read a more detailed analysis of Spectrum Pharmaceuticals click here.
- Alcatel-Lucent (ALU)
Alcatel-Lucent is a victim of its own circumstance. By all accounts, the company's had a good year, but its stock has been devastated with a loss of more than 60% over the last six months. The company's loss is hardly related to its fundamentals, it's more related to the thought that Alcatel-Lucent's earnings could be affected by its headquarters being in Europe, even though a large portion of its business is in the U.S. Investors fear that the financial threats in Europe are enough to drastically impact the company's future earnings, and some speculate that increased competition will affect its market share. These concerns have been the catalyst to drive this stock lower over the last 6 months to a price of extreme value.
Alcatel-Lucent would most likely be #1 on this list if it hadn't already posted a gain of 30% YTD. Both the immediate and long-term potential of this company is among the brightest within the market. In the United States, 3G and 4G service is nothing special, but there are highly populated areas around the world that lack the same network structure as the U.S. Alcatel-Lucent is focusing a lot of its business on emerging markets such as Taiwan and Spain. The company is currently working with two very large network providers in these regions: Chunghwa Telecom (CHT) and Telefonica (TEF) to upgrade its network and develop its 4G LTE. If the network is developed successfully, this could lead to very high profits for Alcatel-Lucent. Based on all known developments, the project is being successfully executed.
The expansion into emerging markets will be a catalyst for future growth and the stock's recent loss is because of its connection to Europe and not necessarily its fundamentals. Alcatel-Lucent trades with a 52 week high of $6.63 and is now posting its best fundamentals in many years. Therefore, as the company continues to develop its emerging markets and the U.S. continues to be strong, this stock will recover and post very large gains throughout 2012.
The stock is trading at 7.87x earnings and its forward ratio is 6.45, which means that analysts expect earnings to improve. I also expect earnings to rise, but its forward ratio is much higher than 6.45. The company has exceeded expectations by an average 28% during its last 4 quarters, with two quarters meeting expectations, and two others beating estimates by a very large margin. This trend should continue. Alcatel-Lucent should exceed expectations, on average, over the next four quarters because the company gives modest guidance. Therefore, I estimate its forward ratio is near 5. Because of its current growth and its projects in emerging markets (which may return high revenues in 2012) Alcatel-Lucent should trade over or near 15x earnings and experience a potential gain of more than 200% throughout 2012.
To read more analysis of ALU click here.
- Sprint Nextel (S)
One of the biggest reasons for upside in BofA is because it's the cheapest of the large banks compared to its book value per share. However, there are many stocks in the financial sector that are considered "cheap" compared to fundamentals. Sprint Nextel trades in the communications services industry and nearly all of the stocks within this sector trade above their actual value, except for Sprint. But no other company in the industry or the market has more upside potential year-over-year than Sprint.
Let's look at the facts, Sprint has been unable to compete with the likes of AT&T (T) or Verizon (VZ) because of it not offering the hottest communication brand in the world, Apple (AAPL). The iPhone is the difference for Sprint and by not having Apple products, it has lost customers to AT&T or Verizon. However, that should change now that Sprint and its competitors are playing on an even field, with the exception of Sprint having the only unlimited data plan for its customers and a network that is being updated to an industry-leading level.
The upside for Sprint is difficult to predict. Even if the company were trading at 52 week highs, I would still have to figure the impact that the iPhone will have on its sales. However, I do know that its future and upside potential have never been brighter now that Sprint has the same products and services. Sprint is very undervalued and is trading at just 50% of its book value per share, while its competitors are trading high above its value, with AT&T trading 50% higher and Verizon trading at nearly 200% greater than its book value per share.
Sprint is trading with a 6 month loss of near 60% and, despite the market's recent gains, at a 3% loss YTD. Because of its current valuation, it has the most upside in the market during 2012. Just look at Sprint's most recent quarter: It improved its margins and improved revenue while posting a loss of only $.10 per share compared to $.30 in the year prior. I am not sure if the company will achieve profitability in 2012, but revenue should increase drastically and losses will be much less. Therefore, Sprint's progress will be enough to create optimism and for the stock to trade much higher in 2012 as it closes the gap between itself and its larger competitors.
Much improved fundamentals will be enough for large gains. But with its low valuation, Sprint is also an enticing acquisition target by a company such as Dish Networks (DISH) which has already shown interest. Either way, the stock will begin trading higher during this earnings season, and will not stop as the year progresses. This week is big for earnings: Apple, AT&T , and Verizon will all announce quarterly results. And as I already mentioned in part 1, sales from the Apple's new iPhone and sales from its older versions should result in the company easily beating expectations. Strong Apple earnings will create optimism among investors and will give investors of Sprint an idea of what to expect for its upcoming quarterly report.
The stock is trading near the bottom of its range, but it's worth much more than its $6 high, back in May of 2011, when the company was not even selling the iPhone. Sprint executives have never denied the impact of not selling the iPhone and its affect on sales. So when Sprint announces earnings, we could see its first profitable quarter in many years, along with new customer rates that double or triple with it being the only unlimited data plan and arguably the best value in communications. The company has already proven in its most recent quarter that it can improve margins and has the ecosystem in place to compete with its competitors. This makes Sprint the best value in the market. But I find it difficult to predict its potential upside, because right now Sprint is worth more than its current 52 week high of $6, and 2012 could be historic for the company's earnings. With all things considered, which include the iPhone 4S being Apple's best selling device and the possibility of an iPhone 5 later in the year, a goal of $8 is not unrealistic, or a gain of more than 250% throughout 2012.
The price targets for these eight stocks in both part 1 and 2 are estimates of the valuations that I believe each stock can achieve based on previous fundamental performance and future growth that is yet to be realized. Both Sprint and Alcatel-Lucent will likely begin trading much higher in this upcoming week, January 23. With Apple, Verizon, and AT&T all announcing earnings, there will be significant optimism surrounding this industry that could return large weekly gains. However, there are several catalysts within the global economy that could limit the performance of these stocks, and the market as a whole, throughout 2012. Despite this, each of these stocks present unprecedented value and should trade much higher in 2012. They are simply too undervalued, regardless of any panic or fear that is present within the market.
Additional disclosure: All information regarding earnings and fundamental performance was obtained from CNBC, with the exception of ratios which were obtained from Yahoo! Finance.