It's Always Darkest Before Dawn: 5 Rock Bottom Buying Opportunities Under $10

|
Includes: BAC, F, FTR, S, XRX
by: David Alton Clark

These seven stocks are trading below $10, down an average of 34% from their 52-week highs yet have positive catalysts for future growth and strong fundamentals. Moreover, most of these stocks have significant upside based on consensus analysts' mean price targets.

These five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 34% below their 52 week highs and have on average 34% upside based on consensus analysts' mean target prices. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks. 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.

Additionally, the five stocks are trading at or below $10. Stocks trading for $10 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.

Finally, these stocks have some very positive fundamentals. Now, simply screening for $10 stocks trading significantly below consensus and 52 week highs with 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 Thursday's performance for the stocks.

Click to enlarge

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 27% below its 52 week high and has 38% upside based on the analysts' consensus mean target price of $10.36 for the company. BAC was trading Thursday for $7.46, down over 2% for the day.

Fundamentally, BAC has several positives. The company has a forward PE of 7.79. BAC is trading for 1.73 times free cash flow and approximately one third of book value. EPS next year is expected to rise by 75%. Insider ownership is up 93% over the past six months.

BAC recently declared $0.01/share quarterly dividend. The dividend yield is 0.5%. The dividend is for shareholders of record Sep 07th and payable Sep 28th. The ex-dividend date is Sep 5th.

The stock is bouncing along the bottom of the uptrend channel. If you want to play it safe wait until after earnings to start a position. BAC should benefit greatly from the upsurge in the U.S. housing market. I like the stock here.

Ford Motor Co. (F)

Click to enlarge

Ford is trading well below its consensus estimates and its 52 week high. The company is trading 31% below its 52 week high and has 57% upside based on the analysts' consensus mean target price of $14.42 for the company. Ford was trading Thursday for $9.19, down over 1% for the day.

Fundamentally, Ford has several positives. The company has a forward P/E of 5.76. Ford is trading for 7.55 times free cash flow and 2.15 times book value. EPS next year is expected to rise by 19.12%. The company pays a dividend with a yield of 2.14% and has a PEG ratio of 0.25.

Ford makes great vehicles. Nevertheless, the stock has not performed well in the last few quarters. But now the stock is trading for $9, just 2% above the 52 week low posted back in October. I see this as a major support level for the stock. I am tempted to start nibbling at Ford here. This is a change in stance for me regarding Ford. Ford is a buy at $9.

Frontier Communications Corporation (FTR)

Click to enlarge

Frontier is trading well below its consensus estimates and its 52 week high. The company is trading 45% below its 52 week high and has 25% upside based on the analysts' consensus mean target price of $4.95 for the company. Frontier was trading Thursday at $3.95, down almost 2% for the day.

Frontier has some fundamental positives. The company is trading at 92% of book value, 78% of sales and has a forward PE of $17.52. Frontier pays a dividend with a 9.93% yield, although the payout ratio may mean the dividends are unsustainable.

I decided to put my money where my mouth is on this one and opened a position in FTR today. Look at the chart. The stock has been posting higher highs and higher lows since the start of May. The stock is a buy here.

Sprint Nextel Corp. (S)

Click to enlarge

Sprint is trading well below its consensus estimates and its 52 week high. The company is trading 42% below its 52 week high and has 24% upside based on the analysts' consensus mean target price of $3.97 for the company. Sprint was trading Thursday for $3.21, down almost 1% for the day.

Fundamentally, Sprint has some positives. Sprint is trading for slightly less than book value and only 28% of sales. EPS next year is expected to rise by 29%. Insider ownership is up 45% over the past six months.

I pulled the trigger on Sprint as well and started a position in the stock today. The company has numerous positive catalysts in the offing and the chart looks good. I see this as an excellent buying opportunity at this level.

Xerox Corp. (XRX)

Click to enlarge

Xerox is trading well below its consensus estimates and its 52 week high. The company is trading 27% below its 52 week high and has 24% upside based on the analysts' consensus mean target price of $9.25 for the company. Xerox was trading Thursday at $7.38, down over 3% for the day.

Fundamentally, Xerox is solid. The company is trading for less than its book value and has a forward PE of 6.30. Xerox sells for 8.6 times free cash flow, 15 is considered undervalued. Xerox's EPS growth rate was over 100% this year. The company pays a dividend with a yield of 2.23%.

Xerox continues to transform itself from a hardware company to a services firm in a move essential to the company's survival. This is a turnaround play. I think Xerox has what it takes to compete. The stock looks undervalued at this level. Xerox is a Buy. If you are concerned about earnings, wait until after they announce on July 20th to start a position.

Conclusion

I am a contrarian investor at heart. I believe these stocks are contrarian buys that have major upside potential once the geopolitical and macroeconomic issues of the eurozone, U.S. and the world fade from the forefront of investors' minds and a renewed focus on fundamentals and company specific catalyst emerges.

It is always darkest before dawn, as the saying goes, and these stocks have major upside once the sentiment tide turns. Potential macro catalyst are the U.S. housing market, the upcoming presidential election, the eurozone resolving its issues and the central banks of the world providing a backstop for stocks in the form of monetary policy and rate cuts.

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.

Disclosure: I am long S, FTR.