After suffering from significant losses in the last year, 2012 has been a good one for the equities. While eurozone countries are still suffering from chronic budget deficits and debt-related issues, the U.S. is in much better shape. Thanks to the Federal Reserve System's active involvement in the recovery process, the interest rates are near their historical lows. The lower interest rates, combined with strong business prospects, have driven several stocks to significantly higher levels in this year. The stocks wrapped up a stellar quarter by the end of the last month. S&P 500 is up by 12% since January. When we look at the sectors, on average all sectors performed well in the last quarter. Financial stocks were the top performers, followed by technology companies and service stocks.
Amidst this bullish atmosphere, several stocks are still trading way below their historical valuation metrics. The bearish investor sentiment has driven these stocks to the bottom of the performance-based comparison lists. Hewlett Packard (HPQ), Alcatel-Lucent (ALU), Alcoa (AA), Southern Copper (SCCO), and Research In Motion (RIMM) were among the biggest losers of the market. In fact these stocks are trading significantly below their 52-week highs. That does not necessarily mean that these stocks are dirt-cheap stocks. I would rather consider them as out-of-favor stocks, under strong selling pressure. Investors have a tendency to panic when their stocks show a strong negative performance, and they end up selling their holdings at the wrong time. Therefore, these stocks might offer good opportunities for contrarian investors.
Hewlett Packard - Ready to Double
Founded in 1939, Hewlett-Packard Company is one of the world's oldest and largest information technology companies. The company not only provides technological instruments such as laptops, printers, cameras, desktops, but it also offers cutting edge software services. Although Hewlett-Packard was affected from numerous disasters on 2011, the company managed to keep its revenues. Its total revenues amounted to $127.2 billion in the last year. HPQ generated a net income of almost $6 billion in the same period.
The valuation metrics suggest that Hewlett-Packard is undervalued. Its fundamentals look strong enough to encourage long-term investors. The company is going through a significant reorganization. Meg Whitman, a well-known business executive, has been CEO since Sep. 22, 2011. Whitman graduated from Harvard and Princeton, and has a strong track record for business success.
The stock is trading just an inch above the book value and 0.37 times the sales revenue. Surely, the thin profit margin of 4.75% is a concern, but HP has a great moat in its business field. Its product lines are of high quality, and the company has a strong brand image around the world. After losing almost half of its market cap, HP has fallen into the dirt-cheap category. At a trailing P/E ratio of 8.22 and forward P/E ratio of 5.26, the stock has a significant margin of safety. This is why I think HP is ready to double.
Alcatel-Lucent - Buy
I think the case of Alcatel-Lucent could be one of the most remarkable turnaround stories in business history classes. The acquisition of Lucent Technologies by Alcatel created the Alcatel-Lucent Company, one of the largest communication equipment providers in the world. Headquartered in the famous 7th arrondissement of Paris, the technology giant employs almost 80,000 employees with operations worldwide. Its shares are trading on both the Euronext and NYSE markets. At the time of the deal, Lucent was valued at $13.4 billion, suggesting a market cap of $33.5 billion for the combined entity. However, the current market cap of $5 billion is way below the company's historical valuation.
Similar to Hewlett-Packard, Alcatel-Lucent is also going through significant reorganization. The merger was expected to reduce the overhead costs, while increasing profit margins. The latest company report suggests that it is heading in this direction. The management expects a higher operating margin as well as a stronger net cash position by the end of this year. The smart phone proliferation is also expected to boost the upward trend in the company's software segment. The debt/equity ratio of 1.2 is a red flag, but the stock is trading with single digit P/E ratios. I think, the current price offers a deep bargain. An effective cost minimization, combined with the market expansion can easily push the stock back to its pre-recession levels.
Alcoa - Buy
Alcoa is one of the prominent global aluminum producers. Established in 1888, the New York-headquartered Alcoa specializes in the production of aluminum, alumina and related products. These products are used to produce final-end products, such as aircrafts, automobiles, construction services, as well as, other industrial outputs. While, the company was able to boost its earnings significantly, the stock has been a big loser in the last year. Even after returning 14% in 2012, Alcoa is still trading 45% below its 52-week high.
As a commodity producer, Alcoa's future performance is closely correlated with the aluminum producer. As we experience some sort of economic recovery, I expect the demand for final-end products to increase. The increased demand for these products will, in turn, boost the demand for the aluminum as a material input. Therefore, Alcoa could be a good pick to play the global recovery in consumer demand.
Southern Copper - Buy
Southern Copper is another basic material producer that is trading near the bottom of its historical valuation range. Established in 1952, the Phoenix, Arizona-headquartered company has grown into a copper mining giant. The company primarily engages in mining, exploration, and refining of copper and related minerals around the world. The oversupply concerns in the copper market have negatively affected the investor sentiment. While Southern Copper was able to boost its earnings by 51% in this year, the stock lost almost 18% in the last 12 months.
With a yield of 6.58%, the company is among the top dividend payers in the market. It also supports an attractive net profit margin of 34%. Surely, the debt/equity ratio is a bit concern, but, Southern Copper has enough cash generation capacity to pay its debt. At the current prices, it is trading with a 20% discount to analysts' mean target price. Similar to Alcoa, it could be a good pick to play the global recovery.
Research In Motion - Watch for Big Moves
RIMM is probably the biggest loser in this list. The stock is like a falling knife. Every day it is dropping to new lows. It is also highly volatile. One day it makes it to the biggest winners list, but the other day it is listed among in the biggest losers of the day. With a short ratio of 13.6%, it is also one of the most-shorted stocks in the market. I think Apple's (AAPL) success in the smart phone market has been somewhat misinterpreted as RIMM's failure.
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The stock lost almost 75% of its market cap in the last 12 months. Interestingly, Apple shareholders gained 84% in the same period. There is no doubt that iPhone has crushed Blackberry in the smart phone arena. However, the market has over-reacted to this process, driving down RIMM stock to significantly oversold levels. The stock has recently formed a double-bottom pattern. Looking at the graph above, one can see that $12 is a strong resistance level. If the stock can stay above this level, there is a very high possibility for a big bounce. Therefore, it is worth to watch RIMM for big moves.
Disclosure: I am long AAPL.