The bullish gap for stocks trading below an expected target price by analysts averaged 27.73%. If analyst forecasts are correct, investors in agreement with the consensus call could generate a healthy return. How accurate is the target price? Are analysts too optimistic, or are the companies trading at fair value?
There are 5 companies that offer the highest likelihood of upside. Companies that fall under the following criteria are also likely to provide the best 1-year return. The company must possess the following qualities:
- Poorly understood by the market
- Oversold and Undervalued
- Possess positive events not recognized by the market
Halliburton Company (HAL)
Cliffs Natural Resources Inc. (CLF)
Sprint Nextel Corporation (S)
Gilead Sciences, Inc. (GILD)
Ford Motor Company (F)
Halliburton is a cementing specialist that is still being punished by the market for its role in the Gulf spill. A favorable ruling was recently issued that would indemnify Halliburton even if Halliburton is found to be grossly negligent. There is still a claim of fraud against the company. A federal trial against BP (BP), Transocean (RIG), and Halliburton is set to begin on February 27.
Halliburton trades at a P/E of 11.13 and closed recently at $36.29, well-above December lows in the 30's. Murry Gerber, a director, purchased 30,000 shares in the company for $1.1M.
Cliffs Natural Resources
After issuing a profit warning, Cliffs Natural Resources plunged, but subsequently recovered. After earnings were reported, shares fell again, closing recently at $66.72. In its earnings report, Cliffs Natural Resources forecast stronger demand in steel demand and iron. This is based on any recovery within the European market. Operational problems (equipment failure) at its Wabush mine lowered production for the quarter.
Cliffs Natural reported a diluted EPS of $11.48, up from $7.49 per share in 2010. This values shares at 5.81. The company is significantly undervalued, and supports the 39.8% upside when using the 1-year price target as a guide.
Although the crisis in Europe remains a big unknown for markets, Cliffs Natural will benefit from any positive developments in news for a resolution. China's reserve ratio cut is also a positive, as construction activity will benefit Cliffs.
With 39.4% upside, Sprint Nextel hit multiple stock price bottoms since December 2011. Sprint faces a number of issues. The company paid Apple (AAPL) a generous sum for making the iPhone 4S available. The company will need to return $65M to Lightsquared if the FCC doesn't approve the LTE network deal by mid-March. Sprint has a market capitalization of around $7B.
With no positive news likely for the company Sprint is not a company to buy at this time.
27.8% is the return investors would make if Gilead reaches its $59.77 target. Unfortunately, Gilead traded at $54.81 before plunging 14.25% on February 17. Investors misunderstood the upside for Gilead in its expensive $11B purchase for Pharmasset. Shares were bid up in the hope that results from a study for its experimental hepatitis C drug GS-7977 would be more positive. The potential looked good at the time. The compound was in Phase 3 testing.
Gilead forecast a diluted EPS impact of $0.31 to $0.34 in 2012 for acquisitions, share compensation, and restructuring costs.
Gilead is not a company to buy, because the good earnings news and positive research data was already announced in February. Closer scrutiny for the expensive Pharmasset purchase will hurt shares.
Despite rising to nearly $13, Ford is still misunderstood by the markets. The economic recovery in the United States, along with stronger demand for automobiles, will be positive for Ford.
Given the rebound, Ford is not oversold, but shares are undervalued. A close above $13 suggests more upside. Similar to Cliffs Natural Resources, Ford will benefit from any positive developments in the resolution of Europe's crisis. A share repurchase plan, and another positive earnings report will help Ford reach the $15.93 target price. Ford recently closed at $12.75.