Overview
The summer swoon is in full effect. The stocks covered in this article have been beaten up with the rest of the market. Nevertheless, they all have positive catalyst for future growth. Additionally, they are trading at steep discounts to analyst mean price targets and most have high EPS growth rates for next year. In the following sections I will expound on these positives and perform a review of each company.
Market Backdrop
The second time this week the market suffered significant losses as the rally faded mid-session. The banks attempted to lead markets higher, but there were few takers. The down draft continued into the close, although a rash of buying providing a lift off the bottom in the final minutes. Telecom +0.1% was the only advancing sector, with Consumer Discretionary -1.5% and Materials -1.5% bringing up the rear.
Company Reviews
The stocks covered in this article possibly fall into the undervalued category. First, the shares of these companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 35% below their 52 week highs and 42% below their consensus analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.
Additionally, our five stocks have an average EPS growth rate for the next year of 72% and share prices trading at or below $10. Stocks trading for $10 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This 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 ensure the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Finally, we will determine if a catalyst for growth exists for the companies based on sector, industry or company specific dynamics. The following table depicts summary statistics and Wednesday'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 48% below its 52 week high and 39% below the analysts' consensus mean target price of $11.79 for the company. Alcoa closed Wednesday at $8.48, down slightly for the day.
Fundamentally, Alcoa is solid. The company is trading a touch over half of its book value and has a forward PE of 9.02. Alcoa sells for 12.77 times free cash flow, 15 is considered undervalued. Alcoa's EPS growth rate this year is over 113% and is projected to be 77% next year. The company is trading 3% above its 52 week low.
Technically, Alcoa is trading at a level that has traditionally shown strong support. The stock has been consolidating at this level for some time now.
The global push to improve fuel efficiency in vehicle fleets will more than double the demand for aluminum in the auto market by 2025, Alcoa's director of automotive marketing, Randall Scheps, said Wednesday, according to Reuters. "Car makers are basically reacting to increases in fuel economy requirements and regulations. Every major market around the world is tightening fuel standards," Scheps said.
Alcoa looks poised to move higher. The risk reward quotient looks positive. If demand doubles for aluminum in cars by 2012, this stock will benefit greatly. I like the stock here.
JDS Uniphase Corporation (JDSU)
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JDSU is trading well below its consensus estimates and its 52 week high. The company is trading 43% below its 52 week high and 48% below the analysts' consensus mean target price of $14.62 for the company. JDSU closed Wednesday at $9.90, down 3% for the day.
Fundamentally, JDSU is struggling. On the positive side, the company is trading a touch over two times its book value and has a forward PE of 11.93. JDSU's EPS growth rate this year is over 212% and is projected to be 46% next year. On the other hand, JDSU sells for 46 times free cash flow, over 30 is considered overvalued.
Technically, JDSU recently posted higher highs and higher lows. This is the first sign the trend may be about to change. I feel the risk to the downside is minimal at this level.
JDSU announced Wednesday that four of its communications test solutions have been recognized with industry awards for innovation in network and service enablement. JDSU's PacketPortal was selected by Pipeline for its 2012 Product Innovation Award, naming it the most innovative new communications technology product in the market.
This bodes well for the company's future. JDSU is a highly volatile stock predisposed to making big moves. The stock looks primed to rally with the recent good news regarding new products. The stock is a buy here.
Southwest Airlines Co. (LUV)
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Southwest is trading well below its consensus estimates and its 52 week high. The company is trading 21% below its 52 week high and 26% below the analysts' consensus mean target price of $11.58 for the company. Southwest closed Wednesday at $9.19, up over 2% for the day.
Fundamentally, Southwest is solid. The company is trading on par with its book value and has a forward PE of 8.51. Southwest sells for 11.90 times free cash flow, 15 is considered undervalued. Southwest's EPS growth rate is projected to be 42% next year.
Technically, Southwest recently posted higher highs and higher lows. The stock looks great here. It is in a defined uptrend and rests at the midpoint of the channel.
With oil prices down big, Southwest's stock looks poised to pop. On Tuesday Southwest Airlines Co. and its AirTran subsidiary kicked off a sale with prices from $98 to $278 per round trip, depending on distance. It covers travel from Aug. 13 through Nov. 14. With Southwest's frugal management protocols, Southwest is a leader in these sales tactics. I expect them to do well. Additionally, this is a bet on the US. The eurozone debacle will have little direct effect on the company's performance.
Southwest looks primed to rally with the recent good news regarding oil prices. The stock is a buy here.
Micron Technology Inc. (MU)
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Micron is trading well below its consensus estimates and its 52 week high. The company is trading 36% below its 52 week high and 78% below the analysts' consensus mean target price of $10.45 for the company. Micron closed Wednesday at $5.86, down slightly over 1% for the day.
Fundamentally, Micron is struggling. On the positive side, Micron's EPS growth rate is projected to be 192% next year. The company is trading for three quarters of its book value and has a forward PE of 10.09. On the other hand, Micron is unprofitable and has declining quarter over quarter sales and EPS growth rates.
Technically, Micron recently bounced off the bottom of it trend channel, although the stock is still significantly beat up. The stock looks like it's found a bottom.
Jefferies & Co.'s Sundeep Bajikar reiterated his Buy rating with an $11 price target Wednesday on Micron. Bajikar stated that investors are "ignoring strength in market DRAM prices." About 80% to 90% of Micron's DRAM revenue is determined by contract prices, writes Bajikar. Overall DRAM contract pricing rose 33% in May from the December levels, he notes, faster than the 14% rise in "spot" prices of DRAM this year.
I am taking Micron out of the penalty box. I agree with Bajikar. Moreover, the stock has one of the highest potential upsides based on the analyst mean price target. Micron is a Buy.
Xerox Corp. (XRX)
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Xerox is trading well below its consensus estimates and its 52 week high. The company is trading 28% below its 52 week high and 21% below the analysts' consensus mean target price of $9.25 for the company. Xerox closed Wednesday at $7.63, up almost 1% for the day.
Fundamentally, Xerox is solid. The company is trading for less than its book value and has a forward PE of 6.25. Xerox sells for 8.6 times free cash flow, 15 is considered undervalued. Xerox's EPS growth rate was over 100% this year, but is only projected to be 8% next year.
Technically, Xerox is in good shape. Xerox recently bounced off the bottom of its upward trend channel. Moreover, the stock just broke through the 50 day sma which is bullish.
Xerox continues to transform itself from a hardware company to a services firm in a move essential to the company's survival. This is a turnaround play. I think Xerox has what it takes to compete. The stock looks undervalued at this level. Xerox is a Buy.
Conclusion
The last two summers were the time to buy. I see this one as no different. The economic results released Thursday morning along with the Italian bond sales results will rule the day. This may provide another opportunity to pick these stocks up even cheaper. I think the numbers may disappoint.
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.
