All eyes will be on the jobs report due out Friday morning. Even so, it appears to be a win-win scenario for stocks. Either we get a strong number and the market moves higher or we get a weak number which may induce the Fed to employ another round of QE. With the rest of the world employing QE and dropping rates, the door is wide open for the Fed to ease. The dollar is up substantially.
The stocks covered in this article perhaps 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 40% below their 52 week highs and 28% below their consensus analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.
Additionally, the five stocks have some positive fundamentals and share prices trading at or below $5. Stocks trading for $5 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 stocks with market caps of $2 billion or greater. 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 Thursday's performance for the stocks.
Brocade Communications Systems, Inc. (BRCD)
Brocade is trading below its 52 week high and consensus estimates. The company is trading 28% below its 52 week high and 22% below the analysts' consensus mean target price of $6.05 for the company. Brocade closed Thursday at $4.94, up basically flat for the day.
Brocade has some fundamental positives. The company is trading slightly above book value and has a forward PE of $8.22. Brocade is trading for 5.55 times free cash flow. EPS is up 58% quarter over quarter.
Cantor Fitzgerald recently made a bullish call on the enterprise storage space, upgrading Brocade to a Buy. Cantor thinks Brocade's plans to monetize part of its oversized San Jose campus will strengthen its balance sheet.
The stock has performed well since the start of June posting higher highs and higher lows. It recently broke above the 50 sma and is trading 4% below its 200 day sma. I would buy the stock once it confirms the uptrend by breaching the 200 day sma. The stock is a Buy.
Frontier Communications Corporation (FTR)
Frontier is trading well below its consensus estimates and its 52 week high. The company is trading 46% below its 52 week high and 24% below the analysts' consensus mean target price of $4.96 for the company. Frontier closed Thursday at $4.01, up almost 1% for the day.
Frontier has some fundamental positives. The company is trading at 91% of book value, 78% of sales and has a forward PE of $17.43. Frontier pays a dividend with a 9.98% yield, although the payout ratio may mean the dividends are unsustainable.
I have been pounding the table on FTR since the shares were at $3. The shares are still trading at multi-decade lows, insiders are buying and the stock was recently upgraded. The stock has been in a well-defined uptrend since the start of May. The stock is a Buy at this level.
Nokia Corporation (NOK)
Nokia is trading well below its consensus estimates and its 52 week high. The company is trading 70% below its 52 week high and 54% below the analysts' consensus mean target price of $3.12 for the company. Nokia was trading Thursday for $2.02, down over 5% for the day.
Fundamentally, Nokia has some positives. Nokia is trading for approximately half of book value and only 17% of sales. EPS next year is expected to rise by 103%. Frontier pays a dividend with a 12.50% yield, although the company is currently not profitable which may mean the dividends are unsustainable.
Nokia's stock has been crushed. The stock is in a downward spiral with no end in sight. The smartphone market is brutal. Microsoft recently said that Phone 7 devices won't be upgradeable to the upcoming Windows 8 software. This may have frozen potential buyers. If you were going to buy a Windows-based phone, why would you buy one now knowing new Windows 8 smartphones were on the way? It has been one blunder after another for Nokia. The stock is a sell.
Sprint Nextel Corp. (S)
Sprint is trading well below its consensus estimates and its 52 week high. The company is trading 42% below its 52 week high and 18% below the analysts' consensus mean target price of $3.89 for the company. Sprint was trading Thursday for $3.31, down 5% for the day.
Fundamentally, Sprint has some positives. Sprint is trading for slightly less than book value and only 29% of sales. EPS next year is expected to rise by 29%. Insider ownership is up 45% over the past six months.
During the past eight months, Sprint has announced four rugged Sprint Direct Connect handsets: Kyocera DuraMax, Kyocera DuraCore, Kyocera DuraPlus and Motorola ADMIRAL [TM], which cater to push-to-talk users. Last month, Sprint made International Direct Connect available on its Sprint Direct Connect devices, expanding the reach of push-to-talk capabilities to and from Mexico, Brazil, Argentina, Peru and Chile.
Additionally, Sprint says its 4G LTE network will go live in five cities on July 15th. Separately, Tero Kuittinen argues T-Mobile's woes could work to Sprint's benefit. These developments may be major catalysts for the stock. The stock has been on a tear since mid-April. I see this pullback as a buying opportunity.
SIRIUS XM Radio Inc. (SIRI)
SIRIUS is trading well below its consensus estimates and its 52 week high. The company is trading 13% below its 52 week high and 23% below the analysts' consensus mean target price of $2.57 for the company. SIRIUS was trading Thursday for $2.09, up over 2% for the day.
Fundamentally, SIRIUS has some positives. SIRIUS has a forward P/E of 19 and trades for 18 times free cash flow. EPS next year is expected to rise by 57%. Quarter over quarter sales and EPS are up 11% and 22% respectively. Siri's TTM ROE is 80% and the company's net profit margin is 14.75%.
The stock has recently popped over 10% and is now trading 6% over its 200 day sma. The stock has been consolidating at the $1.80 mark since mid-May. I see the recent upswing in luxury car sales as a major catalyst for the stock. The stock is a buy, although I would wait for the stock to cool down some prior to starting a position. The $2 mark may be a good entry point.
The last two summers were the time to buy. I see this one as no different. The stock I would avoid is Nokia. I don't see any catalyst on the horizon for the company. These are contrarian speculative buys. I believe you should have 5% to 10% of your portfolio dedicated to speculation depending on your suitability.
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.