Overview
The five global growth stocks covered in this article have been sold off hard over the past month based on macroeconomic and geopolitical concerns arising from the eurozone, China and in recent days the U.S. economy. Nevertheless, four of the five stocks present significant buying opportunities.
Market Backdrop
The three major averages registered their worst May in two years. Intensifying apprehensions regarding the eurozone debt debacle coupled with concerns the U.S. economy is slowing were the main culprits. The below par numbers out Thursday morning plunged the S&P 500 to the 1300 mark, which provided resistance leading to a bounce and renewed interest in bank stocks. Nevertheless, the rally faded and the market ended in the red. The market sank a total of 6% in May marking the worst monthly performance since September. The latest ADP report stated payrolls increased in May by 133,000, significantly below the 157,000 the street was looking for. This is a precursor to the official monthly payroll report due out tomorrow.
Company Reviews
First, these five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 49% below their 52 week highs and 61% 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 raised 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 Thursday's performance for the stocks.
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Alcoa, Inc. (AA)
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Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 49% below its 52 week high and 37% below the analysts' consensus mean target price of $11.74 for the company. Alcoa closed Thursday at $8.55, down less than 1% for the day. Alcoa has several fundamental positives. The company is trading at two thirds of book value, 65% of sales and has a forward PE of $8.72. Alcoa trades for less than 13 times free cash flow and EPS is expected to grow by 75% over the next year. Alcoa's RSI is 36.08.
China's major aluminum producers, including Chalco (ACH), are cutting output by 10% starting June 1st, stung by rising import prices of bauxite at a time of industry overcapacity. It's finally the Chinese production cut Alcoa CEO Kleinfeld has been calling for. This bodes well for aluminum prices going forward.
Even though most stocks tied to global growth were down significantly Thursday, Alcoa remained flat. I see this as a sign the stock may have bottomed. Look for an uptick in the shares for confirmation prior to starting a position. I believe the stock is undervalued at this level.
AK Steel Holding Corporation (AKS)
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AK Steel is trading well below its consensus estimates and its 52 week high. The company is trading 63% below its 52 week high and 58% below the analysts' consensus mean target price of $9.54 for the company. AK Steel closed Thursday at $6.03, down almost 4% for the day. AK Steel has few fundamental positives. The company has a forward PE of $5.69, is expecting EPS to grow significantly next year and pay a dividend yielding over 3%. AK Steel's RSI is 33.93.
Nevertheless, the company is not currently profitable swinging to a net loss of $11.8M from a profit of $8.7M a year earlier. A fall in shipment volumes overshadowed a rise in steel prices. Even so, the company expects a Q2 profit with the street forecasting EPS of $0.21.
I was bullish on the stock previously, but after seeing the share price continue to plummet, I would avoid the stock until the second quarter results are released. The strong talk is encouraging; nonetheless the proof is in the pudding so to say. I would not attempt to catch this falling knife. There are better opportunities available with less risk.
Peabody Energy Corp. (BTU)
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Peabody is trading well below its consensus estimates and its 52 week high. The company is trading 63% below its 52 week high and 92% below the analysts' consensus mean target price of $44.88 for the company. Peabody closed Thursday at $23.36, down 2.42% for the day. Peabody has several fundamental positives. The company is trading for slightly over book value, 77% of sales and has a forward PE of $6.49. Peabody has a PEG ratio of .41 and has an EPS growth rate of 34.83% over the next year. Peabody has a dividend yield of 1.46% and trades for less than nine times free cash flow. Peabody's RSI is 34.05.
Goldman Sachs recently upgraded Peabody to Buy, saying it finds U.S. coal stocks "attractive" following a recent sell-off. Goldman believes production cuts, higher gas prices and increased exports will help improve thermal coal prices in the second half of 2012.
I agree with Goldman and believe the stock is current under accumulation. The stock has been consolidating for the last few weeks at this level. The pullback post the Goldman call is a buying opportunity. I like the stock here.
Caterpillar Inc. (CAT)
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Caterpillar is trading well below its consensus estimates and its 52 week high. The company is trading 25% below its 52 week high and 49% below the analysts' consensus mean target price of $130.95 for the company. Caterpillar closed Thursday at $87.62, slightly less than 3% for the day. Caterpillar has several fundamental positives. Caterpillar has a forward PE of $7.24 and a PEG ratio of .63. Quarter over quarter Sales and EPS growth are up by 23.41% and 28.45% respectively. Caterpillar pays a dividend with a yield of 2.10%. The company has a ROE of 38.33% Caterpillar's RSI is 32.14.
Caterpillar fell Thursday in sympathy with Joy Global (JOY) after Joy reported a slowdown in orders. As is often the case, weak hands sold first and asked questions later. Once the dust settled, Joy CEO Mike Sutherlin clarified his statement. Despite an order slowdown in the latest quarter, he remains upbeat on global demand for mining equipment from overseas, including China. He says that while some planned projects may be pushed back because of broad economic uncertainty, producers were moving ahead with existing expansion.
In April Caterpillar recorded record profits and upped 2012 guidance. I feel the recent sell off is unjustified and this stock is undervalued at the current level. I would start a position here. This is definitely a buying opportunity.
Freeport-McMoRan Copper & Gold Inc. (FCX)
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Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 42% below its 52 week high and 66% below the analysts' consensus mean target price of $53.30 for the company. Freeport closed Thursday at $32.04, down slightly over 1% for the day. Freeport has several fundamental positives. Freeport has a forward PE of $6.13 and a PEG ratio of 1.39. EPS is expected to grow by 29.78% next year. Freeport pays a dividend with a yield of nearly 4%. The company has a ROE of 25.55% and a net profit margin of 24.64%. Freeport's RSI is 32.42.
Morgan Stanley argues dividend yields look increasingly attractive vs. record low Treasury yields. The payout ratio of dividend stocks is near an all-time low and could increase substantially. The firm added AT&T (T) to its dividend portfolio and stated Freeport was "fundamentally and quantitatively attractive" amongst others.
Freeport has vacillated between $60 and $30 over the past two years, implying the stock could possibly double in a year's time. I have been very successful getting in at this level in the past. I like the stock here.
Conclusion
We always live in an uncertain world. What is certain is that the United States will go forward over time.
What a great quote from Warren Buffett. The fact of the matter is every correction in history has been followed by a rally to even higher levels. The past two summer swoons were followed by tremendous rallies. Now is the time to start layering in to positions over the summer months. Layer in to these stocks using 10% tranches on a weekly basis over the next few months. This will minimize losses and reduce risk substantially. Even though AK Steel is down big and is calling for profits in the next quarter, I see less risky opportunities out there at this time. Avoid the AK Steel until it reports earnings.
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 at least a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss if you wish to minimize losses even further.
