The five companies covered in this article are trading well below their consensus estimates and 52 week highs. The companies are trading on average 39% below their 52 week highs and 48% below their consensus analysts' mean target prices. These stocks appear undervalued to me. We are in the midst of a sell off based on macroeconomic and geopolitical issues. Often, this is precisely the time to pick up shares in out of favor stocks with strong fundamentals and catalysts for future growth.
Additionally, our five stocks have share prices trading under $15. Stocks trading for under $15 often tend to have increased volatility. However, as we all know, the higher the risk, the higher the reward. The stocks selected are S&P 500 stocks with market caps of more than $5 billion. We use this speculative screen to find companies that may provide more bang for your buck.
Finally, the stocks have an average earnings per share (EPS) growth projection for the next year of over 46%. A company's EPS is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its profitability EPS information. The reason earnings are so vital to investors is that they tell you about the relative profitability of a company. EPS is the most important derivative of profitability for a shareholder.
Now, simply screening for S&P 500 stocks with high EPS growth rates, share prices under $15 and trading significantly below consensus and 52 week highs is only the first step to finding winners that may provide alpha. In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Wednesday's performance for the stocks.
Alcoa, Inc. (AA)
Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 50.34% below its 52 week high and 38% below the analysts' consensus mean target price of $11.74 for the company. Alcoa closed Wednesday at $8.40, down 2.53% for the day. Alcoa has an average earnings per share growth projection for the next year of over 69.64%. The company is trading at nearly half of book value and has a relatively low forward PE ratio of 8.94.
Alcoa beat earnings expectations and guided higher on April 10th. It seems like a lifetime ago. The constant news feed of negative macro-economic news coming out of the eurozone has drowned out any positive earnings results. The stock has dropped nearly 15% since reporting earnings. This is definitely a contrarian pick, as sentiment has turned against the basic materials stock.
Nevertheless, I like it here. Reviewing the chart above, you can see that the stock has reached this level only twice before in the previous year and support has been strong. This is an ideal point to pick up some shares. Layer in to the position a quarter at a time over the next four months and I feel you will be well positioned for profits when the macro picture brightens.
Bank of America Corporation (BAC)
BAC is trading well below its consensus estimates and its 52 week high. The company is trading 40.99% below its 52 week high and 75% below the analysts' consensus mean target price of $12.44 for the company. BAC closed Wednesday at $7.11, down 2.60% for the day. BAC has an average earnings per share growth projection for the next year of over 69.35%. The company is trading at a third of book value and has a relatively low forward PE ratio of 6.77.
I have been a big proponent of BAC for quite some time. I bought BAC at $5.12 at the beginning of the year and sold at $9.00 after the stress tests. I thought the stress tests would give the banks credibility and allow them to lead us higher by the end of the year. The JPMorgan $2 billion dollar snafu that has now grown to a $3 billion dollar snag has put a damper on my position regarding the banks. I friend stated the amount of the losses was insignificant to JPM and I was overreacting. Hey, I'll give you $3 billion may not be much compared to the rest of JPM's balance sheet, nonetheless, the loss of the high ground in the banking regulations debate was incalculable. Jaime Dimon was the lead antagonist in the upcoming debates regarding whether the banks deserved all the new regulations forthcoming. Now he has no leg to stand on. The headline risk alone is enough to keep me out of this all bank stocks. This is going to be a long drawn out slog.
With the upcoming elections highlighting the ever-present "U.S. Fiscal Cliff," the unending eurozone sovereign debt debacle and the forthcoming skewering of the banks by Congress and the Senate, I'll sit this one out thank you. I see no positive catalyst for the banks on the horizon. I posit BAC could retrace all the way back to $5.00 before it's all over. Avoid the banks.
Ford Motor Co. (F)
Ford is trading well below its consensus estimates and its 52 week high. The company is trading 33.15% below its 52 week high and 57% below the analysts' consensus mean target price of $15.92 for the company. Ford closed Wednesday at $10.16, basically flat for the day. Ford has an average earnings per share growth projection for the next year of over 16.22%. The company is trading at a little over two times book value and has a relatively low forward PE ratio of 6.77. The PEG ratio is signaling the stock is vastly undervalued at .30.
AP reported late Wednesday night that Ford dealers are now taking orders for the Ford C-MAX Hybrid, which will be more affordable than Toyota Prius while achieving better fuel economy. I see this as a major positive catalyst for the company moving forward. The main issue for Ford has been the weak European market. Ford has superior products, management and improving fundamentals. The stock has disappointed me over the last year and has been in a nosedive since the beginning of April. Even so, the stock is nearing the $9.75 mark which is the point where I see the risk/reward equation changing drastically.
If you review the chart this seems to be a level where the stock has strong support. Six out of eight times the stock has rebounded significantly from this level. The other two times it was only below the $9.75 mark for a short period. I would wait for the stock to break below the $10 dollar mark and start layering in a quarter at a time over the next two months. The company is primed to move higher. I have faith CEO Alan Mulally will increase shareholder wealth in the near future.
Southwest Airlines Co. (LUV)
LUV is trading well below its consensus estimates and its 52 week high. The company is trading 33.84% below its 52 week high and 40% below the analysts' consensus mean target price of $ 11.46 for the company. LUV closed Wednesday at $8.21, up almost 2% for the day. LUV has an average earnings per share growth projection for the next year of over 47.83%. The company is trading at a 10% discount to book value and has a relatively low forward PE ratio of 8.05.
First, I have to disclose I am I big fan of LUV being a proud Texan. Company management has the right stuff and LUV's customer service is unchallenged in the industry. LUV does a tremendous job of hedging fuel costs so when oil prices start to drop, the stock will often perform inversely to the industry. Nevertheless, oil appears to be heading much lower and will only allow LUV to lock in even more profits. On April 4th Barclays upgraded the stock from Equal Weight to Overweight and upped their price target from $11 to $13, implying an almost 60% upside in the stock. If you review the chart, you will see the stock has been consolidating for nearly three months at the current level. I see this as a big positive for the stock. The company is trading at 12 times leveraged free cash flow, which is extremely undervalued.
The airlines have been in the dog house for quite some time, as many pundits postulated $100 oil was the new normal. Seemingly, this standpoint has been proven incorrect. I see oil dropping lower throughout the rest of the year. This development coupled with the summer travel season bodes well for LUV's stock price. I like the stock here.
NVIDIA Corporation (NVDA)
NVDA is trading well below its consensus estimates and its 52 week high. The company is trading 36.48% below its 52 week high and 31% below the analysts' consensus mean target price of $16.71 for the company. NVDA closed Wednesday at $12.74, down slightly over 2% for the day. NVDA has an average earnings per share growth projection for the next year of over 28.17%. The company is trading at slightly less than two times book value and has a relatively low forward PE ratio of 13.99. Cantor Fitzgerald initiated coverage on the stock on April 5th with a Buy rating and a $20 price target, implying a 57% upside in the stock.
NVIDIA recently struck a lucrative deal with cloud gaming company Gaikai. Gaikai's partnership with NVIDIA will allow the game-maker to use both Kepler and CUDA, which allows for dedicated video encoding. The future of the partnership may include the use of smart TVs and Android devices. NVIDIA and Gaikai recently tested a virtual console that streams games to a smart TV via a wireless game pad. Game developers expected to utilize the virtual console include Epic Games and Capcom. I posit this is a major catalyst for the stock.
Moreover, Nvidia Corp. shares popped last Friday after the chipmaker reported lower first-quarter profit and sales, but issued guidance topping expectations. In a statement, Chief Executive Jen-Hsun Huang cited gains in both the company's core graphics chip and mobile computing businesses based on its Tegra products. Referring to the introduction of products based on the latest version of Microsoft Corp.'s Windows operating system and the chip designs of ARM Holdings, Huang stated, "Tegra is on a growth track again, driven by great mobile device wins and the upcoming Windows on ARM launch."
The stock just bounced off the low for the year, raised guidance and broke into the cloud computing industry. Needless to say, I posit things are looking up for this chip stock. I like the stock here. Nevertheless, I always layer in to positions a quarter at a time. The thing I adjust is the wait period between buys. I usually will use weekly intervals for stocks I feel may move quickly and monthly intervals for stocks with longer time horizons.
Market volatility often provides an opportunity to buy stocks on your watch list at discount prices. I believe these stocks are exhibiting value at current levels. Even so, I am avoiding the banking sector for the foreseeable future. Therefore, I cannot recommend BAC.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.