The five global growth stocks covered in this article have been sold off hard over the past month based on macroeconomic and geopolitical concerns arising from the eurozone, China and in recent days the U.S. economy. Nevertheless, I believe three of the five stocks present significant buying opportunities.
Asian markets shot up Friday when China's second-quarter gross domestic product data landed in line with estimates. According to a recent Reuters report,
China's economy grew 7.6 percent in the April-June quarter from a year earlier, the slowest pace since the January-March quarter of 2009, and in line with market expectations for a 7.6 percent rise. It marks the sixth consecutive quarter of slower growth and compared with an annual growth of 8.1 percent in the first three months of 2012.
The number is not as bad as many market participants were expecting. With all the negativity in the news recently I believe the markets have priced in a worst case scenario and therefore due for a rally.
These five stocks are down an average of 48% 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 48% below their 52 week highs and have on average 55% 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 if you have a long-term time horizon.
Finally, these stocks have some positive fundamentals. Now, simply screening for 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.
AK Steel Holding Corporation (AKS)
AK Steel is trading well below its consensus estimates and its 52 week high. The company is trading 64% below its 52 week high and has 26% upside based on the analysts' consensus mean target price of $7.20 for the company. AK Steel closed Thursday at $5.72, down almost 3% for the day.
AK Steel has few fundamental positives. The company has a forward PE of 7.15, is expecting EPS to grow significantly next year and pays a dividend yielding 3.5%. EPS for the next five years is expected to rise by 26%.
S&P recently cut its credit rating on AK Steel to B+ from BB-, citing high fixed costs and weak prices. Additionally, the company is not currently profitable swinging to a net loss of $11.8M from a profit of $8.7M a year earlier. I was bullish on the stock previously, but after seeing the share price continue to plummet, I would avoid the stock until the second quarter results are released on July 24th.
Caterpillar Inc. (CAT)
Caterpillar is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and has 49% upside based on the analysts' consensus mean target price of $124.68 for the company. Caterpillar closed Thursday at $79.64, flat for the day.
Caterpillar has several fundamental positives. Caterpillar has a forward PE of 7.10 and a PEG ratio of .57. Quarter over quarter sales and EPS growth are up by 23.41% and 28.45% respectively. Caterpillar pays a dividend with a yield of 2.61%. The company has a ROE of 38.33%.
Caterpillar fell Thursday in sympathy with Cummins Inc. (CMI) after Cummins reported weaker U.S. orders from truck and power generation customers, a stronger dollar and softer demand in emerging markets. As is often the case, weak hands sold first and asked questions later.
In April Caterpillar recorded record profits and upped 2012 guidance. I feel the recent sell off was overdone and this stock is undervalued at the current level. I would start a position here. This is definitely a buying opportunity if you have a long-term time horizon.
Cliffs Natural Resources Inc. (CLF)
Cliffs is trading well below its consensus estimates and its 52 week high. The company is trading 55% below its 52 week high and has 84% upside based on the analysts' consensus mean target price of $83.81 for the company. Cliffs was trading Friday for $45.28, down almost 2% for the day.
Fundamentally, Cliffs has several positives. The company has a forward P/E of 4.47. Cliffs is trading for 7.53 times free cash flow and 1.05 times book value. EPS next year is expected to rise by 24.11%. The company pays a dividend with a yield of 5.52% 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. I would hold off on this stock until at least after the next earnings date on July 25th. I expect you will get a better opportunity to start a position. Avoid the stock for now.
Cummins is trading well below its consensus estimates and its 52 week high. The company is trading 34% below its 52 week high and has 49% upside based on the analysts' consensus mean target price of $128.07 for the company. Cummins was trading Thursday for $85.77, up almost 3% for the day.
Fundamentally, Cummins has several positives. The company has a forward P/E of 7.26. Cummins is trading for 16.45 times free cash flow and 2.74 times book value. Quarter over quarter EPS growth is up 36.34%. The company pays a dividend with a yield of 1.87% and has a PEG ratio of 0.57.
The issuance of the corporation's 2012 guidance update on July 10th caused the stock to nose dive over 10% in one day with additional losses yesterday as well. Expectations of 2012 revenues were cut causing annual growth projections to drop by 10%. Nevertheless, the stock bounced back today as market participants bought up shares seen as oversold. Even with the lowered expectations, Cummins is still trading at the bottom of its five year valuation range. I like the stock at this level.
United States Steel Corp. (X)
US Steel is trading well below its consensus estimates and its 52 week high. The company is trading 55% below its 52 week high and has 53% based on the analysts' consensus mean target price of $30.82 for the company. US Steel was trading Thursday for $20.18, down over 2% for the day.
Fundamentally, US Steel has some positives. The company has a forward PE of 6.55. US Steel is trading for 84% of book value. EPS next year is expected to rise by 105%. Insider ownership is up 31% over the past six months and the company pays a dividend of 1%.
U.S. Steel shares bounced off the $18 mark and are up 10% over the last month most likely due to the appointment of Mario Longhi as COO to replace John Goodish. Shares have climbed significantly over the past month, but are still down over 50% year over year. I like the recent price action in the stock. I would be a buyer at this level.
The fact of the matter is every correction in history has been followed by a rally to even higher levels. The past two summer swoons were followed by tremendous rallies. This Friday the 13th may not be that scary for the markets. I predict investors will break out their shopping lists and pick up some of the shares on sale driving the markets higher.
Furthermore, I believe many failed to interpret the recently released FOMC minutes correctly. The minutes were from a meeting in June. This was prior to many of the recent negative developments. I have faith that Bernanke andcompany will step in soon causing the dollar to drop in value relative to foreign currencies. It's a race to the bottom for the world's central banks and the Fed won't be left behind.
Now is the time to start layering in to positions over the summer months. Layer in to these stocks using 10% tranches on a weekly basis at a minimum over the next few months. This will minimize losses and reduce risk substantially.
Even though AK Steel and Cliffs are down big, I see less risky opportunities out there at this time. You have to buy low to sell high. The time to buy stocks is when they are out of favor. This is a counter intuitive methodology. When I write an article like this and receive negative feedback from others it underpins my thesis. The time to start worrying is when everyone agrees with you.
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 at least 10% at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss if you wish to minimize losses even further.