Here we go again, with the eurozone leading investors and global markets down the primrose path once more. The conspiracy theorist in me wonders how they are able to time these European upheavals with the end of earnings season. Has anyone else noticed this coincidence? One thing I'm sure of is every correction brings out the prophets of doom in droves. All the positive economic and fundamental data is forgotten and the focus on negative headlines becomes inordinate. Consequently, correlation and volatility in stocks rises substantially. Stocks resemble ships at sea rising and falling in unison with the ebb and flow of the bad news tide.
Nevertheless, discerning investors are able to distill the positives ... you are able to buy unjustly sold off quality stocks at a discount price. With index funds and ETFs being sold ad nauseum, many stocks are sold indiscriminately, creating oversold conditions in fundamentally strong stocks. The stocks covered in this article possibly fall into this category.
First, the shares of these companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 37% below their 52 week highs and 64% below their consensus analysts' estimates. This fact alone means little, but it's a good starting point when looking for undervalued stocks.
Second, these stocks have an average Relative Strength Index (RSI) of 28 which indicates the stocks are in oversold territory technically. 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, our five stocks have positive EPS growth rates and share prices trading at or below $10. Stocks trading for $10 or less tend to have a higher beta which provides the opportunity for greater returns (or losses) relative to the market. These are S&P 500 stocks with market caps of more than $2 billion. We use a speculative screen to find solid companies that may provide more bang for your buck.
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. Finally, 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 49% below its 52 week high and 39% below the analysts' consensus mean target price of $11.74 for the company. Alcoa closed Wednesday at $8.61, up 1.41% for the day. Alcoa has many fundamental positives. The company is trading 67% of book value and a forward PE of 8.66. Alcoa sells for a measly 12.77 times free cash flow. Alcoa's EPS growth rate this year is over 100% and is projected to be 75% next year. The company is trading 1% above its 52 week low. Alcoa's RSI is 27.88.
I have been pounding the table on Alcoa some time. The company beat earnings and guided higher. It is now trading at a level that has traditionally shown strong support. Alcoa recently announced it will hold back on alumina refinery expansion In Australia. The company expects these steps to curb the oversupply of alumina while enhancing the efficiency of its refining system.
I like the stock here and plan on allocating funds to this name throughout the summer, layering in 10% at a time on weekly intervals.
Advanced Micro Devices, Inc. (AMD)
AMD is trading well below its consensus estimates and its 52 week high. The company is trading 31% below its 52 week high and 58% below the analysts' consensus mean target price of $9.48 for the company. AMD closed Wednesday at $6.08, basically flat for the day. AMD has many fundamental positives. The company is trading up 14% year to date and has a forward PE of 6.92. AMD sells for a meager 10.67 times free cash flow. AMD's EPS growth rate this year is only 4% but is projected to be up 18% next year. The company is trading only 1% above its 52 week low. AMD's RSI is 24.75.
AMD's main focus has been developing competitive micro-processors for PCs and servers. AMD is picking up market share in these segments. AMD's gross margins have improved as well. FBR Capital reiterated its Outperform on May 21st with a price target of $9, implying a 39% upside in the next twelve months. Additionally, insider ownership is up 37% over the past six months. There's an old adage on the Street regarding insider buying, there are many reasons insiders sell stocks, but only one reason they buy. They know it's going up.
The stock looks like its forming a base at this level. I like it here but would wait for the stock to consolidate for a few more weeks prior to starting a position to confirm a bottom.
Ford Motor Co. (F)
Ford is trading well below its consensus estimates and its 52 week high. The company is trading 29% below its 52 week high and 53% below the analysts' consensus mean target price of $15.92 for the company. Ford closed Wednesday at $10.41, up over 2% for the day. Ford has many fundamental positives. The company has a PEG ratio of .31 and has a forward PE of 6.05. Ford sells for an insane 8.43 times free cash flow. Ford's ROE is an amazing 200% and the EPS growth rate is projected to be up 16% next year. The company has a healthy net profit margin of 14% and pays a dividend with a yield of nearly 2%. Ford's RSI is 36.82.
Ford is firing on all cylinders, yet the stock continues to lag. Ford garnered an additional feather in its cap Tuesday as its credit rating was upgraded to investment grade by Moody's. The stock did not hit my price target of $9.75. Due to the recent credit upgrade, I feel Ford may have turned the corner and is now poised to move higher. Ford has the superior products, excellent management and a strong balance sheet that should eventually generate shareholder wealth. I plan on opening a position at this level.
JDS Uniphase Corporation (JDSU)
JDSU is trading well below its consensus estimates and its 52 week high. The company is trading 50% below its 52 week high and 45% below the analysts' consensus mean target price of $15.06 for the company. JDSU closed Wednesday at $10.36, up 1.36% for the day. JDSU has some fundamental positives. The company trades at just over two times book value and has a forward PE of 12.48. JDSU grew its EPS by an average of 18.72% a year over the last five years. The EPS growth rate is projected to be 46% next year. JDSU's RSI is 30.53.
UBS upgraded the stock on May 10th from Neutral to Buy with a $14.50 dollar price target, implying an over 30% upside to the stock. The company is down due to the flooding in Thailand knocking some of its main customer's factories offline. Nevertheless, the company is back on track and looks ready for another run. This stock is a roller coaster ride, nevertheless, we are at a low point and the stock looks poised to move higher. The 52 week range implies the stock can double in less than a year. The stock has held this level six out of seven times in the last 12 months. The odds of a move higher are favorable. I like the stock at this level.
Micron Technology Inc. (MU)
Micron is trading well below its consensus estimates and its 52 week high. The company is trading 44% below its 52 week high and 82% below the analysts' consensus mean target price of $10.45 for the company. Micron closed Wednesday at $5.75, up slightly less than 1% for the day. Micron has some fundamental positives. The company trades at just 71% of book value and has a forward PE of 9.75. The company has a healthy balance sheet. Micron's RSI is 30.16.
Micron's offer to acquire bankrupt company Elpida Memory was rejected by its bondholders as insufficient, says a Reuters report. In reaction, creditors have contacted South Korea's Hynix (GM:HXSCF) and U.S.-based Global Foundries to facilitate a sale of the assets. This was a key factor in determining my buy call on Micron. Anyone who follows me knows I've had high hopes for Micron for quite some time. The loss of this opportunity for Micron to consolidate supply in the DRAM market is abysmal. This development with the inability of Micron to make a profit has me at my wits end. I see no near term catalyst for the stock and would avoid it even at this steep discount. I don't foresee it dropping any further, but it looks like dead money to me.
If you told someone on Black Monday in 1987 that the markets would be ten-fold higher in 20 years' time, they would have laughed in your face. Nevertheless, that is exactly what happened. I take a lot of heat for my contrarian calls, but that is how I've made money in the market. You must have courage in your convictions to buy when things look bleak and a long enough time horizon for things to work out. If you buy a stock and watch every tick, you will never make a dime. What's more, you must perform your own due diligence to determine for yourself if the stock is worth your hard earned money and buy companies you understand. Good luck and happy hunting.
These are contrarian speculative picks. Micron is the one to avoid, while the others appear to be buying opportunities at current levels. 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.