Seeking Alpha
Long/short equity, tech, banks, oil & gas
Profile| Send Message|
( followers)  

Overview

The summer swoon is in full effect and volatility rules the day, although the market has seen a reprieve in recent sessions.

All eyes were on the Fed Wednesday. After the two day FOMC meeting, Bernanke stated he sees further slowing of the U.S. economy. He stated the Fed will carry on Operation Twist until the end of the year. Operation Twist is a program where the central bank buys long-dated Treasurys and sells an equal quantity of shorter-term securities attempting to keep rates low.

Bernanke did not state they would begin a new round of quantitative easing [QE] at this time; even so, he made sure everyone knew he was prepared to undertake a new round of QE if the economy deteriorated further.

Bernanke stated at the press conference,

Yes, additional asset purchases are among the things we would consider if we need to take additional measures to strengthen the economy. We're prepared to do more. We have to get additional information on the state of the economy, what's happening in Europe.

The stocks covered in this article were actually up on the day, which is a good sign. In the following sections I will perform a review of each company to determine if value exists and it's time to buy.

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. The companies are trading on average nearly 30% below their consensus analysts' mean price targets. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.

Moreover, most of these stocks are trading for much less than 15 times free cash flow and have share prices 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. Stocks trading for less than 15 times free cash flow are considered undervalued. 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. Finally, we will perform an analysis of the fundamental and technical state of each company to determine if it's the right time to start a position. The following table depicts summary statistics and Wednesday's performance for the stocks.

(click to enlarge)

Advanced Micro Devices, Inc. (AMD)

(click to enlarge)

AMD is trading well below its consensus estimates. The company is trading 47% below the analysts' consensus mean target price of $8.93 for the company. AMD was trading Tuesday for $6.06, up over 4% for the day.

Fundamentally, AMD has some positives. AMD trades for 10.49 times free cash flow. The company has a forward P/E of 6.89. EPS next year is expected to rise by 18.92%. Insider ownership is up 49% over the last six months. Nevertheless, the company is not currently profitable making this a highly speculative and risky play. But with high risk come high reward.

AMD shareholders have been whipsawed throughout 2012. The stock had an incredible run from $5 to $8.25 in the first quarter only to see nearly all of the gains given back in the second quarter. Nonetheless, since the start of June the company has seen higher highs and higher lows marking the start of an uptrend.

The specs for the new Xbox Surface, a 7" tablet/gaming controller featuring a 720p display, as well as a "stationary computing device" accompanying it were recently leaked. Like the Xbox 360, the tablet is said to feature an IBM processor. The stationary device (possibly a next-gen Xbox) will also reportedly feature an IBM chip, along with an AMD graphics processor. This could be one of the catalysts for the stock to move higher. FBR Capital reiterated its Outperform rating on the stock in May with a $9 price target. I like the stock here.

E*TRADE Financial Corporation (ETFC)

(click to enlarge)

E*TRADE is trading well below its consensus estimates. The company is trading 21% below the analysts' consensus mean target price of $9.88 for the company. E*TRADE was trading Tuesday for $8.17, up almost 2% for the day.

Fundamentally, E*TRADE has many positives. E*TRADE trades for 5.13 times free cash flow. The company has a forward P/E of 12.57. EPS next year is expected to rise by 30%. Insider ownership is up 70% over the last six months. Quarter over quarter EPS is up over 38%.

E*TRADE has flirted with the $8 mark five time over the past year and always seems to bounce off this level. I see this as a strong point of support for the stock. I recently opened an E*TRADE account because of the great deal they were running. I see this as an excellent buying opportunity for the stock. The stock should rally into earnings on July 16th.

Southwest Airlines Co. (LUV)

(click to enlarge)

Southwest is trading well below its consensus estimates. The company is trading 25% below the analysts' consensus mean target price of $11.62 for the company. Southwest was trading Tuesday for $9.31, up almost 1% for the day.

Fundamentally, Southwest has many positives. Southwest trades for 12.05 times free cash flow. The company has a forward P/E of 8.62. EPS next year is expected to rise by 42%. Insider ownership is up 79% over the last six months. The company is trading for book value and has a PEG ratio of 1.27.

Southwest's stock is about to achieve the coveted golden cross, where the 50 day sma eclipses the 200 day sma. This is considered to be a very bullish sign for a stock. The combination of lower oil prices and zero exposure to Europe make this stock very appealing. The stock has been in a well-defined uptrend since late April. I love the stock at this level, pun intended.

Regions Financial Corp. (RF)

(click to enlarge)

Regions is trading well below its consensus estimates. The company is trading 22% below the analysts' consensus mean target price of $8.23 for the company. Regions was trading Tuesday for $6.74, up slightly for the day.

Fundamentally, Regions has many positives. Regions trades for 2.55 times free cash flow. The company has a forward P/E of 8.75. EPS next year is expected to rise by 28%. The company is trading for half of book value.

The stock has been on fire since October 2011. It has maintained a solid uptrend through the past eight months. The stock bounced off the bottom of the upward trend channel at the beginning of June and has posted higher highs and higher lows since. I am officially taking Regions out of the penalty box at this time. Regions is a buy at this level.

Tenet Healthcare Corp. (THC)

(click to enlarge)

Tenet is trading well below its consensus estimates. The company is trading 20% below the analysts' consensus mean target price of $6.06 for the company. Tenet was trading Tuesday for $5.05, up 2% for the day.

Fundamentally, Tenet has a few positives. The company has a forward P/E of 8.02 while the average for health care providers is 18.8 times earnings. EPS next year is expected to rise by 15%. The company is trading for 1.5 times book value.

Nevertheless, I am placing Tenet in the penalty box. I would avoid the stock until the Supreme Court renders a decision on the constitutionality of the health care bill. The court is expected to make its decision any day now. The outcome will be huge for the stock. The rumor mill has it that the bill will be shot down. This would be bad news for Tenet.

Conclusion

There are definitely stocks out there presenting solid value propositions today. I believe four of the five stocks in this article are buys at current levels. Tenet is seemingly undervalued, yet the looming Supreme Court decision on the Obama health care bill will carry the day for the stock. It is at best a 50-50 shot as to which way the court will rule. Those aren't the odds you want when putting your hard earned money to work.

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.

Source: 4 Dirt Cheap Stocks Under $10 With Nearly 30% Upside To Buy And 1 To Avoid