I like to buy stocks with rebound potential when they are (probably) as cheap as they are going to get. In order to do this, it helps to be prepared to buy when a high-quality company announces news or earnings that disappoints a large number of investors. Disappointing news often sparks a high volume sell-off in the stock and that can create a solid buying opportunity. Stock prices are about supply and demand, so if you can buy when the supply of cheap stock temporarily increases thanks to a high-volume sell-off, the chances of making money can improve significantly.
These short-term buying opportunities are often created when a company reports weaker than expected financial results. Many times if earnings are off by just a couple of pennies, shareholder selling, short sellers jumping on board, and forced margin call selling can combine to result in very exaggerated reactions to the downside, which are frequently only temporary in nature. It often pays to look for these opportunities because stocks that are oversold often rebound in just days or weeks. I recently wrote about 4 other stocks that dropped after earnings and 3 out of 4 of my picks are up as much as 20%, while just one, Monster Worldwide (MWW) is currently down about 3%.
As we are in the midst of earnings season now, I have researched a number of high-quality companies that have seen a sharp stock sell-off in recent days. These stocks could potentially see a reduced amount of selling pressure and an eventual rebound in the near future:
Pepsi, Inc. (PEP) recently announced slightly better than expected results, beating estimates by 2 cents per share. The company announced it posted a profit of $1.15 per share for the fourth quarter, and also stated it plans to layoff about 8,700 people as part of a plan to reduce expenses by $1.5 billion, by 2014. Pepsi is also planning to boost the marketing budget for some key brands such as Doritos, Mountain Dew, Gatorade, and 7UP.
Even though the company reported a solid quarter, some investors and analysts seemed concerned about plans to boost the marketing budget and initiate layoffs. Those might seem like negatives in the short-term as they will result in higher expenses, but an increase in the marketing budget is likely to result in higher sales, plus the $1.5 billion cost savings plan could result in larger profits by 2014.
Pepsi shares were trading around $67 per share before earnings were announced, and have since fallen to about $62. Pepsi is expected to earn $4.09 in 2012, and $4.44 in 2013. It offers a solid dividend of $2.06 per share which yields 3.3%. By contrast, Coca Cola (KO) trades for about $69 per share and it is expected to post very similar earnings, with estimates at $4.08 in 2012 and $4.48 per share for 2013.
I believe there is a short-term opportunity to buy Pepsi shares for less right now as it probably won't take long for investors to revisit the value this stock offers. Investors are likely to recognize that Pepsi is trading at a discount to Coca Cola shares and also see that they will be paid to wait for higher prices with Pepsi's 3.3% yield. (Coca Cola shares yield about 2.7%.) It makes sense to buy Pepsi now around $62, and add on any further dips.
Cliffs Natural Resources (CLF) is trading well below the 52 week high of $102.48, partially due to concerns over future demand for iron ore and coal. The company recently announced strong results for 2011: Revenues came in at $6.8 billion which was an increase of about $2.1 billion, or a gain of 45%, when compared to 2010. This resulted in earnings of $1.6 billion, or $11.48 per share for the year.
However, the stock dropped from about $77, to around $66 per share after the earnings report. Even though the full-year 2011 results were solid, the fourth quarter looked soft when compared to 2010. In Q4, earnings decreased by about 52% to $185 million, or $1.30 per share, versus profits of $384 million, or $2.82 per share in Q4, 2010.
While it's easy to look at the negatives, there is reason to believe that results could improve over the next couple of quarters. In response to weaker profit margins and excess coal inventories, many coal companies have recently cut production. These cuts could begin impacting the market in the next couple of months and that should lead to improved pricing and margins for coal producers.
In the meantime, Cliffs pays a dividend of $1.12 per share which is equivalent to a yield of 1.6% and investors are getting a chance to buy the stock at lower prices now. The shares look attractive to accumulate now as it trades for a below market average PE ratio of just about 6.7 times earnings. CLF is estimated to earn $9.88 per share in 2012, and $11.92 in 2013. Analysts at Longbow recently placed a buy rating on the stock with a $84 price target.
The best strategy for this stock could be to average in and buy on dips over time. This would enable investors to build a position at the current level, take advantage of any further weakness, and possibly profit in the long-term from the expected improvement in the global economy and in profit margins.
Goodyear Tire (GT) shares were trading for over $15 per share in January, but dropped below $13, after the company reported earnings on February 14, 2012. Sales in the fourth quarter for 2011, totaled $5.7 billion, which was a gain of 12 percent from 2010. While sales were up, profits were down to $18 million, or about 7 cents per share for the quarter. Results were impacted in part by the flooding in Thailand where Goodyear has a major manufacturing plant.
According to the earnings release: "Goodyear expects long-term growth in the global tire industry to continue, but at a slower pace near term than previously forecast due to continued economic weakness in multiple markets. The company expects that its full-year tire unit volume for 2012 will be essentially flat with 2011." Investors never like to see the words "flat" or "slower pace" when it comes to stocks they own, however, Goodyear shares are not priced for growth.
The stock is not trading at a high multiple. In fact, it's trading at less than 6 times forward earnings. Goodyear is estimated to earn about $1.98 in 2012, and $2.55 for 2013. The average stock in the S&P 500 Index trades at a PE ratio of over 12 times earnings, so these shares look very undervalued now. Goodyear has one of the most recognizable brands in the world and it also owns other famous tires brands such as Fulda and Dunlop. This looks like a very good time to buy on dips, and put away a few shares for the long term.
Arch Coal, Inc. (ACI) was trading between $15 to $16 per share in early February, but the stock dropped to about $13 per share after earnings were released. The company reported adjusted earnings of $61.5 million, or 29 cents per share for the fourth quarter. These shares are trading way below the 52 week high of $36.99 and now appear to be bouncing along the bottom. The stock has found support at about $13 per share more than once in the past few months, and that is why the shares look compelling now.
Just as with Cliffs Natural Resources, this company has been impacted by weaker profit margins and concerns over coal demand from key countries like China. However, the stock seems to have more than priced in these issues at just about $13 per share. Investors buying now will be paid to wait as this stock pays a dividend of 44 cents per share, which yields 3.1%. Furthermore, these share appear undervalued with book value coming in at $16.92 per share.
Estimates have dropped considerably in recent weeks and now are at $1.06 for 2012, and $1.35 for 2013. Previously, estimates for 2012 and 2013 were around $1.97 and $2.41, respectively. Of course, when estimates were higher, the stock was also much higher, but what you have now is a chance to buy at what could be the bottom of the cycle and below book value. Industry conditions are likely to improve in the coming months since some major coal companies have recently slashed production. The longer-term outlook is even brighter as the global economy should see stronger growth in the future. This is another stock where it makes sense to take an initial position in the $13 area, and add on dips.
iRobot Corporation (IRBT) shares were surging in the first weeks of 2012, climbing from about $29, to around $38. It looks like investors were bidding up the stock before earnings, but after the company released earnings on February 8, 2012, the stock plunged to about $25. Fourth quarter revenues increased 15 percent to $130.8 million, which compares favorably with $114 million for 2010. Full year 2011 revenues increased 16 percent to about $465 million from $401 million for 2010. Q4 earnings were 38 cents per share, compared with 26 cents for 2010. Full-year earnings were $1.44 per share versus 96 cents last year.
These results were solid, but what investors seemed to be concerned with was guidance for 2012. The company is estimating that revenues will range between $465 to $485 million and suggested earnings will fall between 75 to 95 cents per share. The company makes a wide variety of robots for consumer, business and military use. The company cites limited visibility in the defense business for the weaker than expected guidance.
While the guidance is disappointing, the stock is interesting for investors with a longer-term outlook. The robotics industry is likely to see continued growth and iRobot has proven itself to be very capable in creating robots that sell. Furthermore, the stock doesn't look too expensive if you consider that the company has almost $170 million in cash on the balance sheet, which is equivalent to about $6.50 per share. With the stock trading at just under $26 per share now, investors are paying a more reasonable price to earnings multiple for the shares. This stock has some rebound potential in the short-term, but in the long run it could surprise more significantly to the upside as the company introduces more products and develops the consumer and military robotics potential more fully.
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 educational purposes only.