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Overview

The financial sector led the market higher Friday ending the day in the green. The S&P 500 rebounded off its second worst performance this year the previous day.

The Dow was up 67.21 points, or 0.53 percent, at 12,640.78. The S&P 500 ended 9.51 points higher, or 0.72 percent, at 1,335.02. The Nasdaq rose 33.33 points, or 1.17 percent, at 2,892.42. Nevertheless, the markets were still lower for the week.

It was a buy the news event when Moody's announced downgrades for 15 of the world's largest banks. Bank shares rose after the downgrades were announced. The downgrades had been telegraphed and some were not as austere as expected. The KBW Bank index (.BKX) gained 1.4 percent. European leaders agreed on a 130 billion euro stimulus package. This development underpinned the market's rally.

As market participants' fears grow at some point all the bad news gets priced in and then some. The market has a capitulation session where the selling gets overdone creating opportunities. Fundamentally solid companies with strong profits and prospects for future growth are sold off indiscriminately. I believe the following five companies may fall into this category. Please review the following section for a brief review of the five companies.

Company Reviews

The five companies covered in this article are profitable S&P 500 stocks. These five stocks have an average net profit margin of 20%. A company's profitability is very important. Profits signal to banks, suppliers and other lenders that the business can pay debts. Profits earned which are kept in the business are known as retained profits. These funds can be distributed to shareholders in the form of dividends, used to buy back shares or reinvested in the company to facilitate future growth.

Furthermore, these stocks are trading at bargain basement prices based on the fundamental indicator known as the PEG ratio (Price/Earning/Growth). The PEG ratio is a widely accepted indicator of a stock's prospective value. Similar to the price to earnings ratio, a lower PEG means that the stock is more undervalued. Many investors use one as the cut-off point for PEG ratios. A PEG of 1 or less is believed to be a promising indication that significant value exists. As Warren Buffett would say, "Price is what you pay, value is what you get."

One caveat regarding the use of the PEG ratio is you need to perform additional due diligence and determine if the projected growth of the company is from healthy sources such as organic growth. Growth by acquisition or stocks buy backs may be unsustainable at some point. These stocks have PEG ratios of approximately 1 and EPS growth rates for next year of greater than 20%.

Finally, these stocks are trading well below consensus estimates and 52 week highs. The companies are trading on average 44% below their consensus analysts' mean target prices and 32% below their 52 week highs. Now we must discern if these stocks are value traps or trades. We need to separate the wheat from the chaff by performing further due diligence. Simply screening for S&P 500 stocks with the high profit margins, low PEG ratios and trading significantly below consensus estimates and 52 week highs is only the first step to finding winners for your portfolio. The following table depicts summary statistics and Friday's performance for the stocks.

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Applied Materials Inc. (AMAT)

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AMAT is trading well below its consensus estimates and its 52 week high. The company is trading 18% below its 52 week high and 30% below the analysts' consensus mean target price of $14.63 for the company. AMAT was trading Friday for $11.24, flat for the day.

Fundamentally, AMAT has several positives. The company has a forward P/E of 9.69. AMAT is trading for 9.88 times free cash flow and 1.65 times book value. EPS next year is expected to rise by 23.40%. The company pays a dividend with a yield of 3.20% and has a net profit margin of 13.80%.

AMAT has bounced off a low of $10 recently and trended higher for most of June. Stifel Nicolaus raised its price target for AMAT to $15 from $13 after the company names Gary Dickerson as its president. "Dickerson has one of the most successful track records in the industry...we believe this is the most positive news for Applied Materials in some time," Stifel Nicolaus says. I may start a position if the stock breeches the 200 day sma within the next few days.

Cliffs Natural Resources Inc. (CLF)

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Cliffs is trading well below its consensus estimates and its 52 week high. The company is trading 52% below its 52 week high and 77% below the analysts' consensus mean target price of $84.50 for the company. Cliffs was trading Friday for $47.63, down over 1% for the day.

Fundamentally, Cliffs has several positives. The company has a forward P/E of 4.59. Cliffs is trading for 7.92 times free cash flow and 1.11 times book value. EPS next year is expected to rise by 23.45%. The company pays a dividend with a yield of 5.25% and has a net profit margin of 26.16%.

Cliffs recently reduced its FY12 thermal coal sales and production estimates from 1.1M tons to approximately 800K tons at its Toney Fork mine in West Virginia. The company cites softer U.S. pricing for thermal coal products, saying "Thermal coal usage for power generation has declined sharply, driven by the extremely mild winter and historically low natural gas prices." I would hold off on this stock until at least after the next earnings date.

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 64% below the analysts' consensus mean target price of $53.05 for the company. Freeport was trading Friday for $32.30, down over 2% for the day.

Fundamentally, Freeport has several positives. The company has a forward P/E of 6.33. Freeport is trading for 1.90 times book value. EPS next year is expected to rise by 26.87%. The company pays a dividend with a yield of 3.87% and has a net profit margin of 24.64%.

The use of molybdenum was at an all-time high in 2011 according to the International Molybdenum Association. Molybdenum is used to strengthen steel. Freeport is the largest producer of the molybdenum. Freeport recently reopened its historic Climax molybdenum mine near Leadville, Colorado. This may help offset any losses in due to low copper prices. I don't think this news is priced in to the stock with all the gloomy news out as of late. I like the stock here.

JPMorgan Chase & Co. (JPM)

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JPMorgan is trading well below its consensus estimates and its 52 week high. The company is trading 22% below its 52 week high and 28% below the analysts' consensus mean target price of $45.97 for the company. JPMorgan was trading Friday for $35.99, up over 1% for the day.

Fundamentally, JPMorgan has several positives. The company has a forward P/E of 6.33. JPMorgan is trading for 1.35 times free cash flow and 73% of book value. EPS next year is expected to rise by 21%. The company pays a dividend with a yield of 3.33% and has a net profit margin of 19.05%.

JPMorgan shares rose 1.4% to $35.99 following a 2.6 percent drop Thursday. While Moody's downgrades could lead to increased borrowing rates for the affected banks, the action isn't expected to have a big impact on consumers in the short term. One reason, says RBC's Joseph Morford, is that "commercial banks are flush with deposits and liquidity," and are thereby relying less on debt to fund their operations. The downgrade should mark the low for the stock. I see it up big within a year's time. The stock looks good here.

NYSE Euronext, Inc. (NYX)

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NYX is trading well below its consensus estimates and its 52 week high. The company is trading 26% below its 52 week high and 19% below the analysts' consensus mean target price of $29.87 for the company. NYX was trading Friday for $25.11, up almost 2% for the day.

Fundamentally, NYX has several positives. The company has a forward P/E of 9.10. NYX is trading for 14.30 times free cash flow and slightly less than book value. EPS next year is expected to rise by 27.19%. The company pays a dividend with a yield of 4.78% and has a net profit margin of 12.47%.

NYSE Euronext launched an exchange in London as it looks to challenge the LSE in its own back yard. One difficulty is the IPO market stinks right now. Nevertheless, the NYX stands to possibly gain market share from the bungled Facebook (FB) IPO by the Nasdaq Exchange (NDAQ). The stock has been performing well recently. The breech of the 50 day sma was bullish. The stock looks poised to move higher here.

Conclusion

The extreme correlation in stocks combined with recent unbridled volatility often results in the creation of buying opportunities. I feel these stocks are primed for future growth and may present value to investors at current levels.

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 High Yield Stocks With 40% Upside To Buy, 1 To Avoid