Several important data points were released in the past week. The stocks started the week with a boost due to improving manufacturing activity report. The manufacturing productivity index of 53.4% was better than the previous observation of 52.4%. The following day, stocks showed a big disappointment, as the Federal Open Market Committee meeting did not hint any sign of another quantitative easing program. Apparently, the Fed will keep following its operation twist plan, buying long-term duration bonds in exchange for short-term securities. The losses extended to Wednesday. The lower-than-expected data on service-sector index, combined with weak demand for Spanish bonds caused a negative atmosphere in the equity markets. With no good news to push the stocks higher, the markets ended the week mostly in the red territory. When we look at the sectors, financials were the worst performers, followed by industrial companies and conglomerates. Only utility and healthcare stocks ended the week with slightly positive returns.
Amid this investing atmosphere, several stocks made it to new lows in the past week. A stock is usually considered oversold when the relative strength index slides below 30. That does not mean that these stocks are dirt-cheap stocks. I would rather consider them as out-of-favor stocks, under short-term selling pressure. Investors have a tendency to panic when their stocks show a strong negative performance in a short period. Therefore, these stocks might offer good opportunities for contrarian investors. Based on the Relative Strength Index [RSI] indicator, I noticed five stocks that are being dumped by the investors. Let's see why these stocks are in the oversold territory, and whether they can be good contrarian picks after making significant losses recently.
Petro Brazil (PBR) - Buy
Last year has been a tough one for Brazilian equities, including Petro Brazil. While the company was able boost its earnings and sales at double-digit rates, its market cap was slashed by 37% in the last 12 months. $28 was a solid support level, but the stock could not resist the sell-off pressure. By the end of the week, Petro Brazil traded at $25.
Petro Brazil is one of the largest integrated oil and gas companies in the world. In the last year, it generated a net income of $22.93 billion from revenues of $141.78 billion. The company was able to show a double-digit growth rate in the last 5 years. It is also one of the few oil companies that is trading at a discount to the book value. Surely, investing in a developing country such as Brazil has its own risks, but I believe Petro Brazil is worth the risk. After all, the stock is trading at an attractive single-digit P/E ratio of 7.2. If it can keep this double-digit growth, I believe Petro Brazil might support a double-digit return to its shareholders. Therefore, I rate Petro Brazil as a buy.
Telefonica (TEF) - Buy
Telefonica is among my favorite telecommunication providers. The company is headquartered in Madrid, Spain, but it has operations in Latin America, as well as several countries in the Europe. 64% of Telefonica's customers resides in Latin America. The company derives near half of its revenues and earnings from this division.
I think Telefonica is one of the cheapest telecommunication stocks in the market. The stock got even cheaper due to the recent sell-off. Mr. Market gives Telefonica a valuation of $70.9 billion, which is almost 35% lower than a year-ago valuation. Surely, there is a lot going on in Europe, and European stocks have been badly punished in 2011. However, telecommunication services became an essential part of our society. Whether there is a recession or not, people will keep communicating with each other. Besides, Telefonica derives nearly half of its revenues and profits from Latin America, which will be the driving force in company's future. Therefore, I rate Telefonica as a strong buy, particularly when compared to its U.S. peers.
Banco Santander (STD) - Buy
Banco Santander is another Spaniard that was subject to a recent sell-off. Established in 1857, the Madrid-headquartered Banco Santander is one of the oldest banks in the country's history. As a commercial bank, it offers a wide range of banking and financial products. Banco Santander operates not only in Spain, but also in several other European countries, as well as Latin America and the U.S.A.
After the recent sell-off in Spanish banks, the stock looks like a seriously cheap deal. Surely, its exposure to Spanish bonds is a strong red flag, but the valuation metrics suggest a large margin of safety. Nothing seriously has changed in Europe for the last 8 months, but Banco Santander lost almost 40% of its market cap in the same period. The company is on sale as it offers a double-digit yield that is supported by a single digit P/E ratio. I think it could be a pretty good pick for the speculative portion of your portfolio.
Barrick Gold (ABX) - Buy
Barrick Gold mining is primarily engaged in the gold and copper business. Established in 1983, the Toronto, Canada-headquartered Barrick invests in several mines, exploration, and development projects around the world. Barrick Gold also has some oil and gas properties located in Canada.
I believe that precious commodity prices are highly inflated, and related stocks are significantly overvalued. However, Barrick looks like an exception, particularly after the recent sell-off. The stock is trading with a single-digit P/E ratio of 9 and forward P/E ratio of 6.86. While I am not a fan of gold-related stocks, Barrick Gold looks like a deal with significant upside potential. Therefore, I rate it as a buy.
Williams Partners (WPZ) - Hold
Williams Partners L.P. is a master limited partnership that operates in the field of gas pipeline and midstream gas and liquid segments. The pipeline segment owns and operates at about 14000 miles of natural gas pipeline. The Midstream segment is involved in gas and oil gathering and transportation services. The company recently decided to acquire Caiman Midstream. I think that is a strategically sound movement for the long-term. The acquisition is expected to boost the company's presence in the natural gas liquids-rich portion of the Marcellus shale.
As a master limited partnership, Williams Partners can shield its distributions from corporate profit taxes. The distributions are deducted from their taxable income as a "depreciation expense". MLPs' distributions are exempt from corporate taxes to the extent that the deprecation expenses cover their distributable income. Thanks to this favorable status, the partnership offers a yield of 5.65%.
Overvaluation is a significant issue for the MLPs. The low-yield environment, created by quantitative easing program, has pushed several high-yield stocks to over-bought levels. Investors, hungry for stable income flows, have switched to bond alternatives such as MLPs, driving their unit prices above their fair valuations. However, after the recent sell-off, Williams Partners fell into my fair valuation territory. Therefore, I rate it as a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.