Overview
The five stocks covered in this article have been beaten down significantly over the past year. Nevertheless, most are up sharply in recent weeks. With the worst May in years behind us and inklings of positive news coming out of Europe and China, these stocks may be poised to move higher.
Market Backdrop
One positive from having the worst May performance in years is that certain stocks are definitely on sale. Escalating fears regarding the eurozone debt debacle coupled with global growth concerns rattled market participants in recent weeks. The markets have dropped into correction territory.
Nevertheless, there may be light at the end of the tunnel. According to a recent Reuters report, eurozone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audit reports are done in just over a week.
China has taken a bold step to head off a possible slowdown. The Chinese central bank cut both the benchmark lending and deposit rates by 25 basis points on Thursday. Additionally, banks were given flexibility to set competitive lending and deposit rates. Reuters reported China's factory output rose 9.6% in May from a year ago, missing expectations and underpinning the country's growth concerns. China's conservative approach to interest rates has left it with plenty of firepower to stimulate its economy. For this reason, I don't fear a Chinese economic implosion anytime soon.
Company Reviews
These five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 47% below their 52 week highs and 61% below their consensus analysts' mean target prices. On the other hand, they are up an average of 8% for the week.
Also, 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 recent upturn 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. Is there a good reason for the recent turnaround? 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 Friday's performance for the stocks.
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Bank of America Corporation (BAC) and Citigroup, Inc. (C)
Bank of America
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BAC is trading 33% below its 52 week high and 58% below the analysts' consensus mean target price of $11.95 for the company. Nonetheless, BAC closed Friday at $7.56, up nearly 8% for the week. BAC has several fundamental positives. The company is trading for one third of book value and has a forward PE of 7.49. BAC trades for less than two times free cash flow and EPS is expected to grow by 72% over the next year.
Technically, the stock seems to be making positive strides with recent higher highs and lower lows established. These developments led me to take a closer look at the stock and see if it was time for me to go long on BAC.
Citigroup, Inc.
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Citigroup is trading 35% below its 52 week high and 48% below the analysts' consensus mean target price of $41.09 for the company. Nonetheless, Citigroup closed Friday at $27.77, up nearly 10% for the week. Citigroup has several fundamental positives. The company is trading for about half of book value and has a forward PE of 6.01. Citigroup trades for less than two times free cash flow and EPS is expected to grow by 13% over the next year.
Moody's (MCO) recently warned of a downgrade of major global banks was imminent. Moody's could issue its expected downgrades of large banks this week, with the short-term debt of BAC and Citigroup set to possibly receive cuts from Prime-1 to Prime-2. In anticipation of Moody's action, money-market funds have been limiting some lending to banks, and municipal bond issuers have been switching bankers.
I say wait for the Moody's downgrade prior to starting a position in BAC or Citigroup. This should mark the bottom for the stocks and provide a good entry point.
Peabody Energy Corp. (BTU)
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Peabody is trading 60% below its 52 week high and 85% below the analysts' consensus mean target price of $44.88 for the company. Nonetheless, Peabody closed Friday at $24.27, up nearly 6% for the week. Peabody has several fundamental positives. The company is trading for slightly over book value and has a forward PE of 6.74. Peabody trades for less than ten times free cash flow and EPS is expected to grow by 34% over the next year. Peabody's PEG ratio is 0.43.
China has approved new steel projects sending Peabody to the top of the S&P leader board Friday. The company sells coal for making steel to Asia markets. Shares of fellow coal miners also surged. It looks as if the stock has found a bottom. I see natural gas prices leveling off and moving higher based on production cuts and continued adoption of the fuel. This will lead to a pick-up in coal use and pricing as well. Peabody looks good here.
Sprint Nextel Corp. (S)
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Sprint is trading 48% below its 52 week high and 30% below the analysts' consensus mean target price of $3.87 for the company. Nonetheless, Sprint closed Friday at $2.98, up nearly 19% for the week. Sprint has several fundamental positives. The company is trading for slightly less than book value and EPS is expected to grow by 30% over the next year. Insider buying is up 45% over the past six months.
Mobile VP Scott Anderson for Best Buy (BBY), recently stated,
"Nokia's (NOK) Lumia 900 is a "very decent seller," but it isn't selling nearly as well as some Android (GOOG) models." He adds, "Pre-orders for Samsung's (SSNLF.PK) Galaxy S III have exceeded expectations, and that HTC's EVO 4G LTE, which runs on Sprint's network, has also seen strong pre-orders. Pac Crest recently claimed the Lumia 900 is doing good business."
This is a good anecdotal signal. Technically the stock looks somewhat over bought at this level though. I would wait for the stock to rest and recover prior to starting a position. Wait for a pullback.
United States Steel Corp. (X)
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US Steel is trading 59% below its 52 week high and 83% below the analysts' consensus mean target price of $35 for the company. Nonetheless, US Steel closed Friday at $19.13, basically flat for the week. US Steel has some fundamental positives. The company is trading for 80% of book value and EPS is expected to grow by 69% over the next year. Insider buying is up 25% over the past six months.
The problem with the stock is the company is not profitable. US Steel expects to return to profitability next quarter. I would avoid the stock until the company proves it has costs under control. Secondly, the stock has been in a free-fall as of late. I have not seen any positive signs the carnage is over. Avoid the stock for now.
Conclusion
It looks like we have good news out of the eurozone coupled with China taking steps to simulate growth. These developments combined with the drop in prices at the pump bode well for the global economy. Don't let the nattering nabobs of negativity - as Spiro Agnew would say - get you down. Now is the time to buy. Even so, I would avoid US Steel until its returns to profitability.
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.
