A perfect storm of negatives brought the market to its knees Thursday. The stock market got walloped posting its second worst loss of the year. The main culprits were the usual suspects - more European turmoil, gloomy economic reports, the overhang of looming downgrades of 15 major banks by Moody's and a menacing warning from Goldman Sachs. The Dow dropped 250.81 or 1.96% to 12,573.57. The NASDAQ was down 71.36 or 2.44% to 2,859.09. The S&P 500 sunk 30.18 or 2.23% to 1325.51. All sectors finished in the red with the energy sector leading the way down 4.0%.
Friday the market is in the green at the time of this writing. It seems investors are looking over the carnage to see if any buying opportunities exist. When the market has such a precipitous drop often time the proverbial baby is thrown out with the bath water. In the following sections we will review five companies that have been sold off hard to see if value exists.
First, these five companies are trading well below their 52 week highs and consensus estimates. The companies are trading on average 62% below their 52 week highs and 64% below their consensus analysts' mean target prices.
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 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 Friday's performance for the stocks.
Alcoa, Inc. (AA)
Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 48% below its 52 week high and 37% below the analysts' consensus mean target price of $11.73 for the company. Alcoa was trading Friday for $8.57, flat for the day.
Fundamentally, Alcoa has several positives. The company has a forward PE of 8.72. Alcoa is trading for 13 times free cash flow and approximately two thirds of book value. EPS next year is expected to rise by 88.46%. Insider ownership is up 20% over the past six months and the company pays a dividend with a yield of 1.40%.
I pulled the trigger on Alcoa today and opened a new position. The catalyst was a recent statement by Alcoa's CEO Klaus Kleinfeld. Kleinfeld told CNBC Europe is a "big question mark" for commodity markets but overall demand for aluminum is strong, particularly for full-body lightweight cars and planes. "The demand structure is very strong," Kleinfeld says, adding that "demand increased by 10% last year and this year it's up 7% so far." The stock is a buy.
Peabody Energy Corp. (BTU)
Peabody is trading well below its consensus estimates and its 52 week high. The company is trading 63% below its 52 week high and 98% below the analysts' consensus mean target price of $44.88 for the company. Peabody was trading Friday for $22.70, flat for the day.
Fundamentally, Peabody has several positives. The company has a forward PE of 6.34. Peabody is trading for 8.55 times free cash flow and slightly over book value. EPS next year is expected to rise by 34.33%. Insider ownership is up 238% over the past six months and the company pays a dividend with a yield of 1.49%.
Peabody has been an out of favor commodity stock for quite some time. The price of coal has been shellacked. Nevertheless, there is an old saying in the commodities industry, "The cure for low commodity prices is low commodity prices." When a commodity hits rock bottom and it is no longer profitable for the providers to produce the product they shut down mining operations and the supple demand situation shifts drastically. We are at that point with coal. This is a contrarian Buy call on Peabody. I believe the risk/reward proposition is favorable for long trades at this level.
Netflix, Inc. (NFLX)
Netflix is trading well below its consensus estimates and its 52 week high. The company is trading 78% below its 52 week high and 37% below the analysts' consensus mean target price of $92.65 for the company. Netflix was trading Friday for $67.67, up almost 3% for the day.
Fundamentally, Netflix has a few positives. Even though the stock has been taken to the proverbial woodshed, it is still classified as a growth stock in my book. According to Finviz.com, EPS next year is expected to rise by 2255.56%. Insider ownership is up 10% over the past six months and the ROE is 34.35%.
Subscriber growth is the metric most watched by investors when it comes to Netflix. I have a cousin who is working on the European roll out. I have not talked to him, but I know he is working very hard. I believe the company has substantial growth left in the tank. Moreover regarding present subscribers, my mother loves her Netflix account and feels it is the best value for content. I know these are only anecdotal examples of positives for the company, but sometimes you have to go with your gut instincts. Netflix at $67 looks like a steal to me. I believe they will surprise to the upside on their next earnings announcement. I like the stock here.
Newfield Exploration Co. (NFX)
Newfield is trading well below its consensus estimates and its 52 week high. The company is trading 64% below its 52 week high and 76% below the analysts' consensus mean target price of $46.10 for the company. Newfield was trading Friday for $26.62, up over 4% for the day.
Fundamentally, Newfield has several positives. The company has a forward PE of 7.29. Newfield is trading for slightly less than book value. EPS next year is expected to rise by 15%. Insider ownership is up 21% over the past six months and the company has a net profit margin of 26%.
The strong dollar combined with talk of a global slowdown has caused oil to drop to its lowest level since October of 2011. Nevertheless, let's not forget we have the European oil embargo of Iranian oil kicking in on July 1st. This would seem like the perfect catalyst for Iran to rattle its saber once more and cause oil prices to spike higher. The oil stocks have been hammered hard recently. I believe we are at an inflection point and oil will begin trending higher as the summer driving season ensues. This is a buy low, sell high contrarian call. I like the stock here.
United States Steel Corp. (X)
US Steel is trading well below its consensus estimates and its 52 week high. The company is trading 59% below its 52 week high and 74% below the analysts' consensus mean target price of $33.29 for the company. US Steel was trading Friday for $19.16, up over 1% for the day.
Fundamentally, US Steel has some positives. The company has a forward PE of 5.38. US Steel is trading for 79% of book value. EPS next year is expected to rise by 92%. Insider ownership is up 25% over the past six months and the company pays a dividend of 1%.
The problem is US Steel is not profitable. The company has a net profit margin of -1%. This company is one of my favorites. I have made money buying low and selling high on this name several times in the past. I would avoid the company until after the next earnings announcement. If earnings improve you will have plenty of time to jump in this name. The stock is prone to large moves. There is no catalyst on the horizon for this stock at this time as far as I can see.
I believe the market has significant upside potential as global issues get resolved and fade from the forefront of investors' minds. When the market sells off it's time to shop for bargains. I bought Alcoa today. On the other hand, I would avoid US Steel until the next earnings announcement. I will keep the rest on my watch list for now; nonetheless, they look like good values to me at this time. The markets gyrate incessantly. The only constant is the fact that they have always gone up over the long haul. These are long-term investments. If you try to trade the market during these volatile times, you will most certainly get crushed.
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.
Disclosure: I am long AA.