The time to buy is when there's blood in the streets, even if the blood is your own.
This well-known maxim is credited to Baron Rothschild, a British financier and member of the famous banking family, who reportedly made a fortune buying in a panic following the Battle of Waterloo.
What a great contrarian quote. In investing, a contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive cynicism about a stock or sector can drive the price so low that it exaggerates the investment's perils and belittles its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett. I believe these stocks may present such an opportunity.
These five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 55% below their 52 week highs and have on average 88% upside based on consensus analysts' mean target prices. This means analysts expect these stocks to nearly double within the next 12 months. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks. Nevertheless, we are in the midst of a sell off based on macroeconomic and geopolitical issues. Often, this is precisely the time to pick up shares in out of favor stocks.
Finally, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and 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 Wednesday's performance for the stocks.
Nomura's Curt Woodworth said:
While the filing for reorganization under Chapter 11 by Patriot Coal Corporation (PCX) will likely pressure the entire sector, we would use weakness to add to positions in CONSOL Energy and Alpha Natural Resources, where valuations are compelling. We see ACI (Reduce rated) as overvalued and remain Neutral on Peabody despite an attractive valuation owing to EPS risk in 2013 for seaborne thermal price contracts and FX headwinds as hedges roll off.
Raymond James recommends buying the dip on Alpha Natural and Peabody. The entire sector is down in sympathy with Patriot. I like Peabody and CONSOL best and would avoid Alpha Natural.
Alpha Natural Resources, Inc.
ANR is trading well below its consensus estimates and its 52 week high. The company is trading 84% below its 52 week high and has 159% upside based on analysts' consensus mean target price of $19.41 for the company. ANR was trading Wednesday for $7.48, down almost 1% for the day.
Fundamentally, ANR has some positives. EPS next year is expected to rise by 29.80%. ANR is trading for less than 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. I need to see some type of relief in the selling prior to opening a position. Avoid ANR for now.
Peabody Energy Corp.
Peabody is trading well below its consensus estimates and its 52 week high. The company is trading 63% below its 52 week high and has 98% upside based on the analysts' consensus mean target price of $43.40 for the company. Peabody was trading Wednesday for $22.24, down almost 1% for the day.
Fundamentally, Peabody has several positives. The company has a forward PE of 6.45. Peabody is trading for 8.33 times free cash flow and slightly over book value. EPS next year is expected to rise by 31.18%. Insider ownership is up 184% over the past six months and the company pays a dividend with a yield of 1.53%.
Peabody has been an out of favor commodity stock for quite some time. This is a contrarian Buy call on Peabody. The price to free cash flow ratio is extremely positive. I believe the risk/reward proposition is favorable for long trades at this level.
CONSOL Energy Inc.
CONSOL is trading well below its consensus estimates and its 52 week high. The company is trading 45% below its 52 week high and has 53% upside based on the analysts' consensus mean target price of $44.59 for the company. CONSOL closed Wednesday at $30.29, up over 2% for the day.
CONSOL has many fundamental positives. The company is trading at less than two times book value, has a PEG ratio of .69 and a forward PE of 13.11. CONSOL pays a dividend with a 1.65% yield with a payout ratio of 19%.
The selloff of CONSOL is a case of the baby being thrown out with the bathwater. The Patriot Coal news combined with the never-ending negative headlines coming out of the eurozone has exacerbated the selloff of CONSOL. Sterne Agee & Leach recently stated,
Certainly, the equity sell off has been indiscriminate for the most part, not fully reflecting quality, liquidity and product mix differentials. Despite an accelerated risk-off trade, recent data are encouraging. Shares appear underpriced and reflect a much more onerous thermal and met-coal pricing scenario.
The stock looks good here. I would layer into the stock 10% at a time using weekly intervals to reduce risk. The coal sector is currently under severe pressure.
Denbury Resources Inc. (DNR)
Denbury is trading well below its consensus estimates and its 52 week high. The company is trading 35% below its 52 week high and has 75% upside based on the analysts' consensus mean target price of $24.41 for the company. Denbury closed Wednesday at $13.97, up slightly for the day.
Fundamentally, Denbury has many positives. The company has a PEG ratio of .42 and is trading for 1.11 times book value. The company has a forward P/E of 9.77. EPS for the next five years is expected to rise by 19.62%. The company has a 29% net profit margin and quarter over quarter sales are increasing at a 25% clip.
Denbury blew away analyst expectations in the first quarter. The company posted record tertiary oil production. Quarterly production rose 12% on an annualized basis. Denbury raised its 2012 annual production guidance. Denbury is a buy at these levels if you have a long-term time horizon. Oil is going nowhere but up. I like the stock here.
SandRidge Energy, Inc. (SD)
SandRidge is trading well below its consensus estimates and its 52 week high. The company is trading 50% below its 52 week high and has 62% upside based on the analysts' consensus mean target price of $10.00 for the company. SandRidge was trading Wednesday for $6.16, up nearly 1% for the day.
Fundamentally, SandRidge has several positives. The company has a forward PE of 19.87. SandRidge is trading for less than two times book value. EPS next year is expected to rise by 121%. The company's net profit margin is 16.75%. Quarter over quarter sales and EPS growth are up 22% and 27% respectively.
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. SandRidge has great prospects for future growth. SandRidge has been consolidating just above the $6 mark since mid-May. The risk/reward ratio looks inviting here. I see SandRidge as a buying opportunity at this level.
The energy markets are notoriously volatile. The only constant is the fact that energy prices have continuously risen over the years. If you have a long term time horizon, these stocks present substantial buying opportunities. Although, I would avoid ANR until after earnings are announced on July 30th or when the chart improves.
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 10% at a time on a weekly basis at a minimum to reduce risk and setting a stop loss order to minimize losses even further.