4 Stocks In Oversold Territory

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 |  Includes: CHK, CSCO, F, JPM, UNG
by: Efsinvestment

Several important data points were released in the past week. The stocks started the week with a mixed investor sentiment. While Dow Jones started in the red territory, Nasdaq composite and S&P 500 was up by a inch on Monday. French and Greek elections were the primary concerns of global markets. As I expected, Socialist Candidate, Francois Hollande, was the winner of the French election. However, the rise of ultra left and right wings in the aftermath of Greek elections was not much welcome. The following day, stocks were down by substantial margins. The complexity of the new Greek parliament caused a negative investor sentiment -- particularly among the European stocks. FTSE 100 closed the day with an average loss of 1.78%. Stocks kept sliding down on Wednesday. The Euro-Greek concerns dominated the investment atmosphere on Wednesday. Stocks finally inched into the green territory on Thursday. The U.S. government posted its first monthly budget surplus since September 2008. I think that was one of the best news of the last week. The positive employment report on jobless claims also added fuel to the bullish sentiment. However, the gains did not extend to Friday, and markets ended the second week of May with substantial losses. Even the University of Michigan's bullish consumer sentiment indicator could not help to counter the selling pressure. Basic material stocks were the biggest losers, followed by conglomerates, and technology companies. Only utilities and healthcare stocks posted modest gains last week.

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. 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.

JPMorgan Chase (NYSE:JPM) - Buy

Back in April, JPMorgan was trading for as high as $46. At that price level, it was in the overbought territory. Therefore, I suggested interested investors to wait for a better entry point. The stock lost 11.5% in the last week, offering a relatively safer entry point. JP Morgan stock was moving more or less in line with the rest of the market, until the company reported a massive trading loss of $2 billion. Apparently, something went terribly wrong within their trading unit. Things as such frequently happen in the hedge fund industry, but investors have no tolerance for these mistakes.


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(Source: Finviz)

I still think that JP Morgan is among the best-run big banks. Thanks to its relatively conservative investment approach, the company survived the financial tsunami with minimal damage. Pimco's co-CIO, Bill Gross also agrees with me, as he states that JP Morgan is one of the "best-run banks in the world." Surely, Bill Gross himself had wrong bets in the past. However, one time mistakes does not affect the long-term performance. At a price of $37, and a forward P/E of 6.62, JP Morgan looks like a good deal to me. From a technical point it is obvious that the large gap between $41 and $37 will be filled at some point. That is another reason to rate JP Morgan as a buy.

Chesapeake Energy (NYSE:CHK) - Buy

Now, there are a lot of questions when it comes to Chesapeake Energy. Here is the first question: Why the stock lost 15% in the last week? The company reported its Form 10-Q on Friday. There was not really anything special in the form. Its total assets amounted to more than $45 billion, whereas total liabilities amounted to $26.6 billion. Out of a total equity of about $19 billion, $3 billion constituted of preferred stock. The only red flag in the company's 10-Q form was the possibility of a delay in the planned asset sales. As the natural gas prices are near their historical lows, that was a good decision. However, the market did not like this idea, as the stock closed the week 15% lower than it started.


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(Source: Finviz)

I have been bullish on Chesapeake Energy since the beginning of this year. My primary thesis was the non-sustainability of low natural gas prices. I still think that the natural gas prices are trading close to their bottom. The spike in the natural gas prices supports my thesis. The United States Natural Gas ETF (NYSEARCA:UNG) closed the last week 9.3% higher than it started. The U.S. Energy Information Administration forecasted that electricity generation from natural gas will increase by as high as 24% in this year alone. The agency also expects the natural gas prices to rise in line with the increasing demand. Rising natural gas prices will surely translate into higher share prices Chesapeake shareholder. Besides, the company announced an unsecured loan of $3 billion from Goldman Sachs and Jefferies. The interest rate of 8.5% is quite high, but the loan will enhance the financial flexibility of the company. That is another reason to consider Chesapeake as a buy.

Cisco Systems (NASDAQ:CSCO) - Buy

Cisco was also among the loser of the last week. The company actually reported better than estimates earnings report. Its FQ3 EPS of $0.48 was one cent higher than the consensus estimate. Revenues of $11.59 billion were also slightly better than the analyst estimates. However, the poor EPS guidance of around $0.45 for the next quarter was not welcome by the investors. The stock lost almost 14% in the last week.


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(Source: Finviz)

I think investors have over-reacted to the mediocre guidance provided by the company. The stock was subject to several downgrades by major investment institutions, but the mean target price implies substantial upside potential. At the current price of $16.5, Cisco has almost 40% upside potential to reach the analysts' mean target price. Based on a conservative EPS growth estimate of 9.4%, my target price of $23 suggests a similar upside potential for Cisco. Therefore, I rate it as a buy.

Ford (NYSE:F) - Buy

Ford is among my favorite car makers in the world. While, the company's brand image in the U.S. is not as high as, Ford is known as a top-quality auto maker in the Europe, as well as many other parts of the world. Last year, was a big disappointment for the shareholders. The eurozone worries, and double-dip recession rumors, caused a massive sell-off in the stock. Ford's market cap was slashed by near 45% in 2011. Since early December, Ford made a big bounce to $13. However, as soon as eurozone issues emerged this year again, Ford was among the first to head south. After the recent sell-off, the stock is trading 30% below its 52-week high.


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(Source: Finviz)

I think Ford is a great company, whose history goes in par with the U.S. industrial growth. The stock is also cheap, trading at attractive ratios. The forward P/E ratio of 6.15 is among the lowest in the industry. The company's huge debt-to-equity ratio of 6.62 is still a red flag, but Ford has the capacity to pay its debt. I believe Ford will re-test its 52-week highs in this year. I keep my buy rating on the stock and suggest any price below $15 as a good deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.