Back in October, few saw a rally coming; the consensus view on Wall Street was more along the lines of the world as we know it was ending and a prolonged double dip recession was on the horizon. The SP500 at 1400 seemed to be like wishful thinking rather than even a remote possibility. So as the rally began, many investors sat on the sidelines, remaining in cash as the SP 500 (SPY) rose over 27% from the lows seen on October 4th. Now 5 months later, Investors are much more confident in the market as some stability has been achieved in Europe and consumer sentiment is showing signs of improvement domestically. The question remains, what should investors that missed the rally do? In this article, I have outlined stocks that missed the rally or are at historically low prices, but I feel that they are still fundamentally sound. Keep in mind that, for the most part, the market is rational, and there is a reason for why these stocks did not participate in the recent rally.
Alcoa Inc. (AA) Why Alcoa Missed the Rally: Alcoa produces aluminum, a commodity whose price is highly correlated to global growth prospects. Continuing fears of recession in Europe and a slowing of growth in China coupled with elevated unemployment domestically has depressed aluminum prices. Investors fear that Alcoa will continue to suffer tightening margins until aluminum prices begin to improve. Why You Should Buy Alcoa: To cope with lower aluminum prices, Alcoa underwent a restructuring process in which unprofitable plants were closed. Insiders say that this recovery has left Alcoa lean and able to profit handsomely when Aluminum prices begin to return to normal levels. The Alcoa Trade: At these levels, it may not be a bad idea to buy Alcoa shares outright, but risk-averse investors may want to consider a covered call strategy. An attractive trade would be to buy the stock and sell either the Jul 21 strike 10 calls for (.79), allowing for a 7% upside potential in the four month life span of the option and 7% downside protection.
Verizon Communications Inc. (VZ) Why Verizon Missed the Rally: Verizon is a low beta stock that is not predisposed to wild movements either direction, up or down. Pair this with a disappointing 4Q results and you get a fair idea why Verizon has missed much of the rally. Why You Should Buy Verizon: Security Analysis aficionados will tell you that it is important to find a company that has a "consumer monopoly," and this is what Verizon has. In many parts of the country, Verizon Wireless which VZ owns 55% of has a vast majority of the wireless market. Verizon is also set to benefit as consumer confidence improves and consumers are able to purchase more expensive data phones and packages. Additionally Verizon is a great stock to own, with a yield of over 5%. The Verizon Trade: Due to the high yield and low beta of Verizon it may be best to buy Verizon shares outright. Savvy investors may consider a strategy called dividend arbitrage. More on this strategy can be found in another one of my articles Implementing Dividend Arbitrage: Verizon Wireless Procter & Gamble (PG) Why Procter & Gamble Missed the Rally: Like Verizon, Proctor & Gamble is a very low beta stock which is not likely to have great price volatility. Additionally, P&G is largely global company and fears of slower global growth have put pressures on its stock price. Why You Should Buy Procter & Gamble: P&G is a consumer staple powerhouse, P&G's 72 brands are largely leaders in their respective categories. P&G's business is non-cyclic, and for the most part, recession-proof. In tough economic times, men are likely to continue shaving with Gillette razors and people will still wash their clothes with Tide. In the case of global growth, P&G will be able to continue their expansion globally. The Procter & Gamble Trade:Due to P&G's low beta, it is not advantageous to sell options on P&G stock, but a risk averse investor may want to consider buying Puts.
Investors should remember that past performance is no predictor of future performance. Just because the stocks outlined in this article have underperformed the broader market does not mean they will continue to underperform. Investors should purchase a stock based upon the strength of the underlying business.