Who said not to sell in May and go away? I was fortunate to have repositioned my portfolio and raised cash earlier in the month, although I did incur losses. The last two summer swoons kept me on my toes. As we moved from the May earnings season to the summer "headlines" season in the prior two years the same set of macro issues reared their ugly heads each time. Greek default rumors coupled with a eurozone debt dilemma and China growth slowing.
I feel like I'm in an episode of the Twilight Zone. Even so, this episode most likely will end on a positive note. The fact of the matter is every market correction based on macro-economic headline risk has been followed by a bull market run to new heights driven by fundamentals and positive economic data. The last two summer swoons in particular were amazing buying opportunities for equities.
Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you have dry powder and take advantage. It is hard to think beyond the current state of affairs and buy when stocks are at their lows. To open a position you must have courage in your convictions. Just remember, a market correction often provides the opportunity to buy great names at a discount price. Searching for diamonds in the rough is one of my favorite pastimes. The following stocks are possible buying opportunities that may provide profits based on their current fundamental and technical conditions.
First, these five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 62% below their 52 week highs and 59% below their consensus analysts' mean target prices.
Second, these stocks have an average Relative Strength Index (RSI) of 34 which indicates the stocks are approaching oversold territory. The RSI indicator is a technical analysis indicator used to measure momentum on a scale of zero to 100. Stocks are considered to be oversold if the RSI reading reaches 30.
Finally, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and guidance. Now, simply screening for S&P 500 stocks trading significantly below consensus and 52 week highs with a low RSI and some strong fundamental data 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 Monday's performance for the stocks.
Frontier Communications Corporation (FTR)
Frontier is trading well below its consensus estimates and its 52 week high. The company is trading 58% below its 52 week high and 80% below the analysts' consensus mean target price of $6.08 for the company. Frontier closed Monday at $3.37, up 4.66% for the day. Frontier has some fundamental positives. The company is trading at three quarters of book value, 66% of sales and has a forward PE of $15. Frontier pays a dividend with an 11.87% yield, although the payout ratio is sky-high. Frontier's RSI is 36.71.
Frontier dipped to multi-decade lows after announcing it will refinance $500M worth of debt by swapping $500M worth of senior notes due in 2014 and 2015 at respective yields of 8.25% and 7.875% with senior notes due in 2021.
Even so, strong insider buying has recently occurred. Six different insiders made open market purchases within a short period of one another recently. Six insiders purchased 137,200 shares at an average price of $3.28/share, for a total of $450,367, with the most recent purchase on May 18, 2012. When multiple insiders make purchases in the open market it could be a strong indication that the stock is undervalued.
After the last leg down, the stock seems to have found a bottom and has been consolidating at the current level of a couple of weeks. This is a speculative contrarian call, but I am considering starting a position at this level.
Nabors Industries Ltd. (NBR)
Nabors is trading well below its consensus estimates and its 52 week high. The company is trading 50% below its 52 week high and 80% below the analysts' consensus mean target price of $25.70 for the company. Nabors closed Monday at $14.29, up 9.42% for the day. Nabors has several fundamental positives. The company is trading at three quarters of book value, 63% of sales and has a forward PE of $5.58. Nabors has a PEG ratio of .53 and has an EPS growth rate of 20% over the next five years. Nabors' RSI is 39.60.
Nabors was one of Monday's top S&P gainers after Guggenheim upgraded shares to Buy from Neutral, "first and foremost" a valuation call. Guggenheim stated. "Improving U.S. gas market fundamentals and expanding international margins (may) prompt investors to consider how oversold the stock has become relative to its underlying asset value and strong cash flow."
I agree with Guggenheim, nevertheless, I would wait for the stock to cool down somewhat prior to starting a position. A 10% move in one day lends itself to a slight sell off in the following days as short timers take profits. Wait three days and revisit this one.
Netflix, Inc. (NFLX)
Netflix is trading well below its consensus estimates and its 52 week high. The company is trading 77% below its 52 week high and 29% below the analysts' consensus mean target price of $92.29 for the company. Netflix closed Monday at $71.74, up 2.57% for the day. Netflix's RSI is 39.60. Netflix is fundamentally challenged. Netflix is a momentum stock. The price is based on the promise of continued subscriber growth as the company expands abroad and in Latin America.
I am not buying it. My mantra when it comes to momentum stocks is, once the first harvest has been taken and the stock has cratered, it's time to avoid the name. This is the case with Netflix. My thesis is underpinned by a couple of recent analyst calls. Caris' David Miller slashed his price target on the company to $56 from $72, and suggested it's tapping out its U.S. addressable market. Netflix's guidance for Q2 domestic streaming net adds of just 200K-800K had much to do with its massive post-earnings sell-off. Needham's Charlie Wolf reiterated an underperform on Netflix recently and slashed his estimates, arguing the decline in Netflix's high-margin DVD business will make it hard to offset international losses with domestic profits. Additionally, the L.A. Times noted some downbeat comments from CFO David Wells about Netflix's Latin American operations. Couple these notes with the enormous amount of competition coming online and you have a recipe to avoid this stock at all costs.
Newfield Exploration Co. (NFX)
Newfield is trading well below its consensus estimates and its 52 week high. The company is trading 61% below its 52 week high and 60% below the analysts' consensus mean target price of $47.18 for the company. Newfield closed Monday at $29.43, up 4.21% for the day. Newfield has several fundamental positives. The company is trading at just under book value, has a PEG ratio of .69 and has a forward PE of $8.82. Newfield has a profit margin of 25.61. Newfield's RSI is 32.70.
Newfield was included in Bank of America's 30 favorite "Global Wave" stocks, which are high-beta stocks, often with low S&P quality rankings and small capitalization, negative correlation to bonds, cyclical earnings growth and high dispersion in earnings estimates. The Global Wave recently turned positive, which historically preceded a 14.2% gain in global stocks. The stock recently bounced off its 52 week low. If the stock can hold this level for the next week, I would feel confident starting a position at this level.
MetroPCS Communications, Inc. (PCS)
MetroPCS is trading well below its consensus estimates and its 52 week high. The company is trading 66% below its 52 week high and 44% below the analysts' consensus mean target price of $9.22 for the company. MetroPCS closed Monday at $6.31, up 0.31% for the day. MetroPCS has several fundamental positives. The company is trading 20% below book value, has a PEG ratio of .57 and has a forward PE of $8.55. MetroPCS has an EPS growth rate of 22.95% for next year. Newfield's RSI is 32.09.
MetroPCS is a Texas based company with strategically placed spectrum licenses. The company is set up for massive expansion. MetroPCS is in merger talks with Deutsche Telekom's U.S. wireless arm, T-Mobile USA. T-Mobile requires spectrum to launch its LTE and is looking to gain access to MetroPCS' LTE. The incentive for MetroPCS is the addition of subscribers. MetroPCS stock has been beaten down since earnings and offers a compelling buying opportunity at this price. I like the stock here.
Trying to ignore the macroeconomic noise and negative headlines is hard. Buying low is not an easy thing to do, believe me I know. The very bottom of the market, during March 2009, was the time to buy. Nonetheless, no one I knew was buying. Everyone was running for the exits at the exact time they should have been piling in. I believe the risk/reward ratio is favorable regarding the future success of these companies. The exception is Netflix. You must face facts - you missed the boat when it comes to Netflix.
These are contrarian speculative picks. 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.