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

Overview

The extreme correlation in stocks combined with recent unbridled volatility often results in the creation of buying opportunities. It's times like this that I search for diamonds in the rough. Diamonds in the rough are stocks hitting their lows which may be oversold. The stocks have fallen to levels where significant value is created. I believe the following five companies may fall into this category. Please review the subsequent section for an analysis of the five companies.

Company Reviews

First, these five companies are trading well below their 52 week highs and consensus estimates. The companies are trading on average 50% below their 52 week highs and 78% below their consensus analysts' mean target prices.

Second, our five stocks have positive EPS growth rates and share prices trading at or below $10. Stocks trading for $10 or less tend to have a higher beta which 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.

Finally, a few of these companies beat analysts' estimates regarding earnings and raised guidance last quarter. With the next earnings season kicking off in July, it may be time to pick up a few of these stocks at current bargain basement prices. Now, simply screening for S&P 500 stocks trading significantly below consensus and 52 week highs, with under $10 share prices and strong EPS growth 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 Tuesday's performance for the stocks.

(click to enlarge)

Alpha Natural Resources, Inc. (ANR)

(click to enlarge)

ANR is trading well below its consensus estimates and its 52 week high. The company is trading 84% below its 52 week high and 154% below the analysts' consensus mean target price of $19.64 for the company. ANR was trading Tuesday for $7.73, down over 3% for the day.

Fundamentally, ANR has some positives. EPS next year is expected to rise by 29.80%. ANR is trading for approximately one quarter of book value. Insider ownership is up 32% over the past six months and the company's sales are up 71% quarter over quarter.

The problem is ANR's chart is nose diving with no relief in sight. Standard & Poor's downgrade of James River Coal (JRCC), which forecast deteriorating liquidity for the company based on the likelihood of weaker coal markets through 2013, is reverberating through the coal sector sending ANR and other peers plummeting. Standard & Poor's downgrade cited the warm winter and natural gas substitution for coal has accelerated a sustained decline in the economic viability of thermal coal. ANR is a sell.

Bank of America Corporation (BAC)

(click to enlarge)

BAC is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and 44% below the analysts' consensus mean target price of $10.94 for the company. BAC was trading Monday for $7.62, down flat for the day.

Fundamentally, BAC has several positives. The company has a forward PE of 7.54. BAC is trading for 1.72 times free cash flow and approximately one third of book value. EPS next year is expected to rise by 68%. Insider ownership is up 149% over the past six months.

BAC has recorded higher highs and higher lows in recent days. Moody's recently downgraded BAC along with 14 other money center banks. RBC's Joseph Morford stated,

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 as commercial banks are flush with deposits and liquidity and are thereby relying less on debt to fund their operations.

The downgrade along with the recent turmoil in Europe should mark the low for BAC. BAC looks good here if you can withstand the volatility.

JDS Uniphase Corporation (JDSU)

(click to enlarge)

JDSU is trading well below its consensus estimates and its 52 week high. The company is trading 41% below its 52 week high and 45% below the analysts' consensus mean target price of $14.53 for the company. JDSU was trading Monday for $10.03, up slightly for the day.

Fundamentally, JDSU has some positives. The company has a forward PE of 12.08. JDSU is trading for approximately 2.16 times book value. EPS next year is expected to rise by 46%. UBS upgraded the stock in May from Neutral to Buy with a $14.50 price target.

JDSU provides communications test and measurement solutions, and optical products for telecommunications service providers, wireless operators, cable operators, network-equipment manufacturers, and enterprises worldwide. According to a recent report by Paragon Financial Limited, growing demand for high-speed networks and smartphones offers significant opportunities for JDSU. According to Gartner Inc. smartphone shipments globally are expected to total 655 million in 2012, more than double 2010's total of 299 million. These developments bode well for JDSU. The stock is a buy.

Micron Technology Inc. (MU)

(click to enlarge)

Micron is trading well below its consensus estimates and its 52 week high. The company is trading 39% below its 52 week high and 76% below the analysts' consensus mean target price of $9.92 for the company. Micron was trading Monday for $5.63, up nearly 1% for the day.

Fundamentally, Micron has some positives. The company has a forward PE of 24.48. Micron is trading for approximately 71% of book value. EPS next year is expected to rise by 123%.

Micron fell 4% last Thursday after delivering a mixed fiscal third quarter report, and providing cautious comments about NAND flash memory sales during its earnings call. Not only did Micron disclose its NAND operations posted a loss thanks to massive price declines, it guided for mere high-single-digit NAND growth for the fiscal fourth quarter, which will be more than offset by further price declines. DRAM pricing remains relatively stable. This is not good news for Micron. Micron is one of my favorite stocks; however, with this kind of guidance, the stock is a sell.

SandRidge Energy, Inc. (SD)

(click to enlarge)

SandRidge is trading well below its consensus estimates and its 52 week high. The company is trading 52% below its 52 week high and 69% below the analysts' consensus mean target price of $10.09 for the company. SandRidge was trading Monday for $5.96, up nearly 1% for the day.

Fundamentally, SandRidge has some positives. The company has a forward PE of 19.23. SandRidge is trading for approximately two times book value. EPS next year is expected to rise by 107%. The company's net profit margin is 16.75%. Quarter over quarter sales and EPS growth are up 22% and 27% respectively.

SandRidge has great prospects for future growth. The stock has been taken down in sympathy with Chesapeake Energy (CHK) due to a perceived connection between the two companies. The drop in oil prices hasn't helped either. Even so, Ed Morse, Citigroup Head of Commodities Research, stated on CNBC's Fast Money,

Crude looks like its oversold and there are a slew of catalysts on the horizon that will send it higher. Number one is summer driving. Demand for crude increases substantially between now and August as Americans take vacation. Second, there's been a delay in refineries coming out of maintenance and that's put downward pressure on demand. Finally, he sees supply coming out of the market. The Saudis are expected to send less supply onto the market over the summer.

I made similar assertions in an earlier article. You have to buy low to sell high. I see SandRidge as a buying opportunity at this level.

Conclusion

Buying stocks under trading for $10 or less is risky business in a volatile market, nonetheless, the higher the risk the higher the reward. Sometimes companies are down for good reason such as Micron and Alpha Natural Resources. On the other hand, sometimes stocks with good prospects for future growth are dragged down with market when negative macro headlines rule the day.

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: 3 Diamonds In The Rough Under $10 To Buy And 2 To Sell