I take a closer look at a list of companies that I would deem "dangerous", since they have 100% or greater volatility than the broader market. These stocks, however, also have the potential for high-risk adjusted returns due to their abnormally low multiples. They cover diverse industries: financials, iron & steel, and automobiles. According to T1 Banker, the Street is recommending a "buy" for these firms. Ford (NYSE:F) is my favorite pick of the three, due to its potential to weather the macro storm and gain market share in the face of tough international competition.
Citigroup (NYSE:C) is rated a "buy" and trades at a respective 8.8x and 6.9x past and forward earnings, with a dividend yield of 0.1%. It has a beta of 2.6.
Consensus estimates for Citigroup's EPS forecast that it will grow by 9.5% to $4.04 in 2012, and then by 16.3% and 11.1% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $4.63, the rough intrinsic value of the stock is $41.85, implying 29.4% upside.
Citigroup had a poor close to the year as clients cut back on risk. On the other hand, the company has improved NIM and has plenty of opportunity to reduce its cost base by around $3B during the course of just this year.
Cliffs Natural (NYSE:CLF) is rated a "buy" and trades at a respective 5.8x past and forward earnings, with a dividend yield of 1.7%. It has a beta of 2.5.
Consensus estimates for Cliffs' EPS forecast that it will decline by 16% to $9.68 in 2012, grow by 20.9% in 2013, and then decline by 13.2% in 2014. Assuming a multiple of 8x and a conservative 2013 EPS of $11.32, the rough intrinsic value of the stock is $90.56, implying 33.5% upside.
Cliffs Natural also posted a poor recent quarterly performance, with operational difficulties at Wabush and significant impairment charges. In my view, the company will benefit from acquiring Walter Energy (NYSE:WLT), after failing to acquire Alpha Natural Resources (ANR) some time ago. Walter stands to benefit by increasing its exposure to met coal, which has positive secular trends.
Ford is rated a "buy" and trades at a respective 2.4x and 7.2x past and forward earnings, with a dividend yield of 1.6%. It has a beta of 2.3.
Consensus estimates for Ford's EPS forecast that it will decline by 2.6% to $1.47 in 2012, and then grow by 15.6% and 15.3% in the following two years. Assuming a multiple of 10x and a conservative 2013 EPS of $1.65, the rough intrinsic value of the stock is $16.50, implying 34.9% upside.
Ford's CEO has hinted at boosting dividend yield to help attract risk-averse investors, as the domestic economy remains challenged. Ford has reportedly stated that it will boost prices by an average of $117 above 2011 prices on its new line of cars - an effort that reflects an industry-wide effort to improve margins and capitalize off a recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.