The markets roil relentlessly as China's economy seemingly stammers and the eurozone continues to have an identity crisis. China seems to be crumbling under its own weight, while the eurozone can't decide whether to go on a spending spree or batten down the hatches. What's more, the eurozone's bipolar behavior has led some to postulate the entire political union may buckle, bringing down global markets with it as riotous revolutionaries flood the streets.
Today, the front page headline of the Financial Times stated The "Cult of Equity" is dead. The lead piece stated global stocks have not been so far out of favor for half a century, prompting many market watchers to declare the "cult of the equity" dead. Andreas Utermann, chief investment officer of the Allianz division that manages €300 billion in assets, stated. "Ultimately what is going on is that fundamental tenets of capitalist society are being questioned."
Negative headlines of this magnitude spark my interest. When I hear this I don't think of it as a time to cash in my stocks and head for the hills. I see it as a possible once in the lifetime buying opportunity. The bottom line is … I'm not buying it. I been around long enough to know the market's resilience is miraculous. It's times like this you should get out your shopping list and see what's on sale. The following stocks are currently trading at a deep discount to analysts' estimates, yet have strong fundamentals. Some may be worthy buying opportunities.
The stocks are trading well below their consensus estimates and 52 week highs. The companies are trading on average 42% below their 52 week highs and 54% below their consensus analysts' estimates. This fact alone means little, but it's a good starting point when hunting for value.
What's more, our five stocks have several strong fundamentals and are S&P 500 stocks with market caps of more than $2 billion. Finally, the share prices of these companies are below $10. Stocks trading for $10 or less tend to provide more bang for your buck. They have a higher beta which provides the opportunity for greater returns (or losses) relative to the market. These are contrarian calls on out of favor names. An example of this type of play is Carl Icahn's recent purchase of a substantial lot of Chesapeake Energy's (NYSE:CHK) stock in recent days.
Nevertheless, in the following sections, we will take a closer look at these stocks to determine if the discounts are justified. We will perform a brief review of the fundamental and technical state of each company. Furthermore, we will discern if any upside potential exists based on sector, industry or company specific catalyst.
Bank of America Corporation (BAC)
BAC is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and 74% below the analysts' consensus mean target price of $12.44 for the company. BAC closed Thursday at $7.14, down .42% for the day. BAC has many fundamental positives. The company is trading for 33% of book value and a forward PE of 6.80. BAC sells for a measly 1.61 times free cash flow. BAC's EPS growth rate this year is over 100% and is projected to be 72% next year.
Nevertheless, quarter over quarter sales and EPS are down significantly. If you follow my articles you know I have recently turned negative on BAC in the aftermath of the JPMorgan (NYSE:JPM) debacle. I started to avoid this stock based on the fact I felt more bad news was on the way. Recently, flaws were found in how loans were created by BAC for Freddie Mac (OTCQB:FMCC). BAC will buy back $330M of the home loans from Freddie Mac. Though a relatively small re-purchase, the bank's overall costs tied to defective home loans have totaled more than $42B so far.
On top of this, on Monday the FDIC sued JPM, Citigroup (NYSE:C), BAC and Deutsche Bank AG (NYSE:DB) in New York, acting as receiver for Strategic Capital Bank which claims $11M in losses in MBS-related losses.
Couple these developments with the banks being racked over the proverbial coals by the Senate and Congress in a transparent attempt by politicians to win brownie points from the voting public in the run up to the presidential election, and you have a recipe for losses. Avoid the banks until further notice; they are dead money for the foreseeable future.
Southwest Airlines Co. (LUV)
Southwest is trading well below its consensus estimates and its 52 week high. The company is trading 28% below its 52 week high and 31% below the analysts' consensus mean target price of $11.46 for the company. Southwest closed Thursday at $8.74, up nearly 5% for the day. Southwest has many fundamental positives. The company is trading for a hair less than book value and has a forward PE of 8.57. Southwest sells for a modest 11.31 times free cash flow. Southwest's EPS growth rate for next year is 47.63% and is projected to be 19.62% over the next five years.
Southwest has produced a string of victories since my last article espousing my admiration for this Texas company. The stock charged out of the gate Thursday, helped in part by a forecast for lower oil prices and two recent major positive catalysts providing tailwinds.
Southwest plans to start making international flights for the first time with its decision to pick up AirTran's routes to Mexico and the Caribbean. The company is looking to add up to 25 flights from a new international terminal at Houston's Hobby airport. Also, Southwest struck a deal with Delta Air Lines (NYSE:DAL) to lease the company's 88 Boeing 717s after deciding it didn't need the jets acquired in its purchase of Airtran. The deal could be a win-win, with Delta able to update its aging fleet and Southwest cutting back costs by only flying 737s. There is nothing but blue skies ahead for Southwest. I like the stock here.
Sprint Nextel Corp. (S)
Sprint is trading well below its consensus estimates and its 52 week high. The company is trading 61% below its 52 week high and 66% below the analysts' consensus mean target price of $4.24 for the company. Sprint closed Thursday at $2.53, up nearly 3% for the day. Sprint has many fundamental positives. The company is trading for 72% of book value. Sprint's EPS growth rate for next year is over 30%.
Sprint's name came up recently in the merger rumor mill. Deutsche Telekom (OTCQX:DTEGY) CEO Rene Obermann says his company is open to merging struggling T-Mobile USA with a rival, but rules out a complete sale. T-Mobile, whose planned sale to AT&T was thwarted by regulators, was recently rumored to have discussed a merger with MetroPCS (PCS). Some think a deal with Sprint is a possibility in spite of 3G network compatibility issues.
Another major catalyst for Sprint is a recent contract it signed with the Western States Contracting Alliance (WSCA). Sprint won the contract with the WSCA to become one of several providers of telecom services covering 15 states.
Finally, insider ownership is up 45% 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. Sprint's stock has been consolidating since mid-April in the $2.50 range. I see this as an opportunity to start a position at this level.
SandRidge Energy, Inc. (SD)
SandRidge is trading well below its consensus estimates and its 52 week high. The company is trading 49% below its 52 week high and 64% below the analysts' consensus mean target price of $10.35 for the company. SandRidge closed Thursday at $6.32, down 1.4% for the day. SandRidge has many fundamental positives. The company is trading for less than two times book value. SandRidge's EPS growth rate for next year is over 70%. Quarter over quarter sales and EPS growth are up 22% and 27% respectively. The company's net profit margin is 16.75.
Canaccord's John Gerdes recently reversed his stance on SandRidge and raised his rating to Hold from Sell, citing the potential for more manageable cash flow financing. He says the company should be able to cover its 2013 cash flow gap with the sell-down of common trust units and the divestiture of ~250K acres in the Mississippian formation in Oklahoma and Kansas.
The company has been in the dog house along with all other energy stocks as oil prices continue their downward trend. The low price of oil is a transitory event which never lasts. Use this weakness as an opportunity to get in on SandRidge for a discount price. This is a long-term play. The CEO expects the stock to triple over the next three years.
Xerox Corp. (XRX)
Xerox is trading well below its consensus estimates and its 52 week high. The company is trading 35% below its 52 week high and 33% below the analysts' consensus mean target price of $9.25 for the company. Xerox closed Thursday at $6.94, down nearly 4% for the day. Xerox has many fundamental positives. The company is trading for 74% of book value and has a forward PE of 5.69. Xerox sells for a meager 7.82 times free cash flow. Xerox's PEG ratio is .66, signaling major undervaluation.
Xerox is an exceptionally cash-rich stock. Insider buying is up 20% over the last six months. The company has a remarkable grip in the professional printing space. The company has high cash flow, a low valuation and a steady revenue stream. The company is focused on increasing services revenues and appears to be rounding the corner. Full disclosure, my mother worked for Xerox and I have always had an affinity for the name. I like the stock here.
It's always darkest before the dawn. Four of the five stocks appear to present value propositions after being beaten down by macro headlines. BAC may look dirt cheap: nonetheless, sometimes things are on sale for a reason. I would avoid the banks until after the presidential election and the 2013 fiscal cliff issue is resolved.
As always, 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.