5 Bargain Stocks: 4 To Buy, 1 To Avoid

Includes: JPM, KEY, MET, NWSA, RF
by: ValueMax

The following five companies are all selling cheaply in terms of earnings, relative to main competitors in the industry that they operate. In this article, I will discuss whether the current price levels are justified. Of these stocks with cheap valuations, KeyCorp should be avoided because it has been reducing reserves for loan losses, which, in my opinion, is unwarranted given continued loan loss risks.

JP Morgan Chase & Co. (NYSE:JPM): JPM has a price to earnings ratio of 8.5 while Bank of America (NYSE:BAC) sells for 788 times earnings and Barclays (NYSE:BCS) sells at slightly over 11 times earnings. Even though JP Morgan is selling far less in terms of earnings, it has more impressive margins with an operating margin of over 30%. Bank of America and Barclays have respective margins of about 4.5% and 26%. Because JP Morgan operates more profitably, it should have a higher price to match efficiency. JP Morgan also pays a 2.6% dividend with a conservative payout ratio of 18%.

Although a settlement was recently reached that required JP Morgan to pay $110 million, it was on the lesser side when compared to Bank of America and Wells Fargo & Company (NYSE:WFC), which paid about $410 million and $200 million respectively. This settlement was derived from the issue of massive overdraft fees of up to $35.

Additionally, JP Morgan generated a net income that was 9% higher than 2010, or $19 billion. This is despite some significant decreases from the prior year, as highlighted in the Fourth Quarter 2011 Earnings Conference Call. This included fixed income and mortgage production and servicing segments. It also recognized a modest net loss in its real estate portfolio.

Acknowledging its ability to grow the bottom line despite many troubled areas, JP Morgan might do well with an economic upswing. Management is doing a great job strategizing and fending off economic downtrends. Considering economies of scale, JP Morgan should have no trouble in the future outperforming competition.

KeyCorp (NYSE:KEY): KeyCorp has a price to earnings of about 9.3 while U.S. Bancorp (NYSE:USB) has one close to 12 and Bank of America, again, has a price to earnings of 788. Additionally, it has a price to book of 0.82. These indicate that KeyCorp is undervalued.

KeyCorp reported declining earnings for the fourth quarter of 2011, on both a year-over-year and quarter-over-quarter basis. Net income from continuing operations came in at $201 million in the fourth quarter, compared to $229 in the third quarter and $279 year-over-year. Although these earnings were less than previous quarters' earnings, they were higher than the consensus estimate polled by Reuters.

The underestimation was mainly due to negative provisions. KeyCorp, rather than adding reserves to its provision for loan losses, has been pulling money out. By decreasing these reserves, the company is subjecting itself to additional credit risk. KeyCorp has been transferring money out of these reserves for the past five quarters, arguably undeservingly boosting profits. This reduction to provisional reserves is unsustainable.

MetLife, Inc. (NYSE:MET): MetLife sells cheaply when compared to Allianz SE (OTCQX:AZSEY), with a price to earnings of about 7 while Allianz sells in the upwards of 12 times earnings. Although its price to earnings isn't as low as that of competitor American International Group (NYSE:AIG) with a price to earnings of just slightly over 6, MetLife has a much lower PEG ratio 0.76 compared to AIG's 3.42. MetLife also has a gross margin of about 36%, which more than doubles that of AIG and Allianz.

Additional optimism can be expressed when discussing MetLife's book value in relation to the stock price. Since 2002, MetLife's book value increased by about 300%, while its stock price only increased by slightly over 21%. Also, since 2002, the company's cash has increased by about 150%.

The reason for a recent dip in the stock price was mainly due to MetLife's substantial exposure to European debt. However, management believes that exposure to international markets is what sets MetLife away from competitors. It has substantial interest in growing countries such as Mexico, Poland, Korea and Chili. All of these countries contribute double digit returns and have impressive growth rates.

News Corporation (NASDAQ:NWSA): News Corp has one of the lowest PEG ratios in the diversified entertainment industry at 0.73. It is ranked number 2 to Walt Disney (NYSE:DIS) in terms of total revenue of $33.9 billion. Additionally, News Corp is expected to pay out a 1% dividend this year. This yield is on the low end when compared to its main competitor Walt Disney's 1.5% yield, and it is even less impressive than the 2.5% dividend yield of Time Warner Inc. (NYSE:TWX). However, what News Corp isn't paying in dividends, it is buying back its stock. It recently announced that it intends on repurchasing $5 billion in stock over the next twelve months from June, 2011.

Second quarter results will be announced on February 8, 2012. For the past three quarters, earnings have curtailed. For the first quarter, net income fell by 4.8% and for the third and fourth quarters of the last fiscal year, earnings decreased by 23.8% and 21.9%, respectively. While earnings have been going south, revenue has been increasing. The first quarter's revenue was up 7.2% year-over-year while the fourth quarter results were up 10.5%. This increased spread is due to shrinking margins.

Even though profits were down, analysts are optimistic about News Corp. A majority of 72.2% of analysts rate News Corp a buy. Analysts are expecting earnings to come in at $0.34 per share, up from $0.29 per share a year ago.

Regions Financial Corporation (NYSE:RF): Despite a recently reported loss, Regions has been making some improvements. Regions simultaneously improved credit quality and loan growth. The fourth-quarter loss was mainly due to a nonrecurring expense caused by the sale of its brokerage unit Morgan Keegan. The earnings would actually be $0.09 per share, which would have beaten analyst's expectations of $0.06 per share.

Additionally, Regions had an 11.3% Basel III capital ratio which well exceeded the 8.5% minimum. Average commercial and industrial loan value was up 11% while the total new commitments were up 14% for the year. Regions also increased total deposits by about $500 million while decreasing the cost of deposits by 24 basis points on a year-over-year basis. Regions saw additional improvements in other loan segments. Commercial and industrial loans added $357 million of new business in the fourth quarter.

Setting aside this most recent quarter, while revenue remained relatively stable, net income improved drastically. The net income in second quarter was about 58% higher than net income in the first quarter and the net income in the third quarter was 24.2% higher than the net income in second quarter. If Regions can maintain these impressive margins while growing revenue, it will become very profitable in the coming quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.