When a good company misses earnings expectations by a couple of pennies, or gives weak guidance, stocks often see totally exaggerated reactions to the downside. It makes sense to look for these opportunities because stocks that are oversold often rebound quickly, sometimes in just days. These big drops can be a great time to buy solid companies that are experiencing what may only be temporary setbacks. The best time to buy a stock that has dropped precipitously is usually a day or two after the bad news is announced. Very heavy volume can often be a sign that the stock is near a bottom or will be soon.
The stocks below recently reported earnings and/or guidance that caused the shares to drop substantially. These stocks could rebound in the coming days and weeks, because investors almost always overreact to both positive and negative news. Also shorts tend to pile-on when they see stocks dropping and they often get carried away, which can lead to a short covering rally. Nimble traders and investors can take advantage of the short-term overreactions to the downside, because when investor sentiment improves, the wave of selling pressure normalizes and valuations tend to revert to the mean:
Chevron Corporation (CVX) shares trade for $103.35. The earnings per share estimate is $12.92 for 2012 and $13.55 for 2013. These shares have traded in a range between $86.68 to $110.99 in the last 52 weeks. The 50-day moving average is $103.82 and the 200-day moving average is $100.84. Chevron pays a dividend of $3.24 per share which is equivalent to a 3% yield. This company recently announced earnings of $2.58 per share for the fourth-quarter, but this was below estimates of about $2.84 and also below earnings for the same period last year. Results were impacted by weak margins in the refining operations and this contributed to a drop in the stock from about $107 down to around $103. The future remains bright and the stock is undervalued with the shares trading for just about 7 times earnings. It makes sense to buy Chevron in stages, buy some now and buy more on any dips. The dividend pays you to wait for higher prices and since it's an oil stock, it offers some inflation protection as well. This stock is likely to bounce back soon because refining margins have started to improve and often increase as demand builds in the quarter before the summer driving season begins.
RadioShack Corp. (RSH) shares have traded in a range between $7.15 to $16.70 in the past 52 weeks. The 50-day moving average is $10.41 and the 200-day moving average is $12.26. Earnings estimates for RSH are $1.19 per share in 2011, and $1.35 for 2012, so the PE ratio is about 6 on these shares. RSH pays a dividend of 50 cents per share which is equivalent to a yield of over 5%. RadioShack announced that fourth quarter earnings would only be about 11-13 cents per share, while analysts had expected about 37 cents. The company said the quarter was impacted by a few issues including heavy discounting during the holiday season. The stock had been trading over $10 per share but it dropped about 20% in the after hours session when the company reported the bad news. The stock will probably find a short-term bottom below $7 per share in the coming days. This could be a good trading opportunity for anyone buying at lower levels and then selling the eventual rebound. I would only consider this as a trading opportunity because this company will probably continue to see competitive pressures from all fronts. However, the move to the downside appears exaggerated and the stock is likely to see a rebound to the upside as bargain hunters buy and shorts cover once they feel the selling is exhausted.
ConocoPhillips (COP) shares have traded in a range between $58.65 to $81.80 in the last 52 weeks. The 50-day moving average is $70.71 and the 200-day moving average is $69.93. Earnings estimates for COP are at $8.27 per share in 2011, and $8.95 for 2012. The dividend is $2.64 per share which provides a 3.8% yield. The company plans to spin off its refining business later in 2012. This could unlock hidden value in the stock, so buying well before the spin-off is likely to payoff for investors. Just days ago, this company reported solid fourth quarter 2011 results. The adjusted earnings were $2.02 per share, which was better than the year-earlier profit of $1.32. Even though the results were solid, the stock fell from about $73 just before earnings were released, down to about $68.50 after. This is a great buying opportunity for long-term investors. Again, refining margins are already improving and should get even better as inventories are built-up in the quarter before the summer driving season. Also, investors will probably start looking forward to the spin off of the refining business in the next couple of months and that could boost the stock.
Xerox, Inc., (XRX) shares are trading at $7.65. The 50-day moving average is about $8.04 and the 200-day moving average is $8.65. These shares have traded in a 52-week range between $6.55 and $11.50. The book value is $8.88 per share. XRX pays a dividend of 17 cents per share which is equivalent to a 2.2% yield. Xerox shares plunged recently after the company reported earnings and guidance for 2012. The company is seeing weakness from Europe and it expects earnings to be about $1.12 to $1.18 for 2012. Analysts had been expecting earnings of $1.25 per share for 2012. The stock was trading close to $9 before earnings and dropped about 12%. With the shares trading below book value and for only about 7 times earnings, it makes sense to start averaging into Xerox before the eventual rebound. This stock can rebound because a 12% drop in the value of the company appears greatly exaggerated over a slightly weak quarter and European issues are not likely to last forever. Plus, shorts may have overplayed their positions here. Short covering and bargain hunters are likely to push this stock higher in the coming days.
Disclaimer: The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.