Overview
I have selected five stocks that appear undervalued based on fundamentals. The stocks covered in this article are trading significantly below their 52 week highs and have significant upside based on consensus analysts' mean price targets. Furthermore, the stocks have strong profitability and below average P/E ratios. These characteristics seem to imply the stocks are undervalued.
Additionally, a few just recently beat analysts' estimates regarding earnings and guidance. All five have PEG ratios less than or near one, which is considered extremely undervalued. You have to buy low to sell high and these companies are down significantly. The question is… are they value trades or traps?
A value trap is a stock that appears to be a bargain based on fundamentals but has no future catalyst for recovery. The stock traps investors when they buy into the company at low prices and the stock never improves. Sometimes stocks are down for good reason. Sector, industry or company specific headwinds may be so strong and prevalent the company may never recover.
In the following sections we will perform a review of the fundamental and technical state of each company to determine if they are value trades or traps. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Monday's performance for the stocks.
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Apple Inc. (AAPL)
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Apple was trading Monday at $595.03, up almost 2% for the day. The company is trading 8% below its 52 week high and has 21% upside potential based on the analysts' consensus mean target price of $78.89 for the company.
Apple is vastly undervalued based on fundamentals. Apple is trading for 13.35 times free cash flow. Apple's PEG ratio is .66. Apple's quarter over quarter EPS and sales growth rates are 20% and 23% respectively. Apple's net profit margin is 26.97%. Apple's ROE is 44.34% and the company has no debt.
Technically, the company is in a well-defined uptrend since the start of the year. The stock is currently resting on the bottom of the trend channel due to the recent earnings miss, which is an ideal time to buy a stock.
In a recent report by Strategy Analytics, second quarter U.S. smartphone data showed Google's Android (GOOG) market share fell to 56.3% and total sales fell 5.4% year over year. The iPhone's market share surged to 33.2%. Apple's customer loyalty facilitated the increase market share in the U.S., although internationally it was a different story. Outside the U.S. first-time buyers are often more price-sensitive.
Apple missed recent earnings estimates partially because people are waiting on the release of the iPhone5. I can't tell you how many articles I've read hyping the new smartphone. This is actually the perfect time to start a position. Often, Apple releases a new product in the September time frame to maximize sales into the holiday gift giving season. Apple is not a value trap.
Bank of America Corporation (BAC)
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BAC is trading well below its consensus estimates and its 52 week high. The company is trading 28% below its 52 week high and has 28% upside potential based on the analysts' consensus mean target price of $9.33 for the company. BAC was trading Monday for $7.28, slightly down for the day.
Fundamentally, BAC has several positives. The company has a forward PE of 7.83. BAC has a net profit margin of 11.62% and a PEG ratio of 1.10. BAC is trading for approximately one third of book value. EPS next year is expected to rise by 66%. Insider ownership is up 93% over the past six months.
BAC has been one of my favorite stocks to trade for the past few years. Nevertheless, I can't help but think the stock is a value trap here. The main issue is the continuing headwinds. Recently, Bank of America, Barclays Plc (BARC) and Credit Suisse Group AG (CSGN) were among the banks sued by an investor over alleged manipulation of the Libor benchmark interest rate. This is just one more issue to deal with regarding BAC. I think it is dead money for the foreseeable future. BAC is a value trap.
Citigroup, Inc. (C)
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Citigroup is trading well below its consensus estimates and its 52 week high. The company is trading 31% below its 52 week high and has 45% potential upside based on the analysts' consensus mean target price of $39.56 for the company. Citigroup was trading Monday for $27.14, down nearly 1% for the day.
Fundamentally, Citigroup has several positives. The company has a forward PE of 5.98. Citigroup is trading for approximately half of book value. The company has a PEG ratio of .91 and a net profit margin of 14.19%. Insider ownership is up 18% over the past six months.
I used to work for Citi so I'm somewhat biased here. The banking sector has been shellacked for quite some time and Citi is down significantly. The fact they were not implicated in the Libor scandal is a big plus. I think Citi can pull out of the rut they are in. They still have a lot of work to do in cleaning up the balance sheet; nonetheless, they are selling at multi-year lows. I say they are not a value trap at this point. I like the stock here.
Ford Motor Co. (F)
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Ford is trading well below its consensus estimates and its 52 week high. The company is trading 30% below its 52 week high and has 46% upside based on the analysts' consensus mean target price of $13.25 for the company. Ford was trading Wednesday for $9.10, up over 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 5.87. Ford is trading for 7.56 times free cash flow and 2.30 times book value. EPS next year is expected to rise by 18.60%. The company pays a dividend with a yield of 2.20% and has a PEG ratio of 0.23 and a net profit margin of 14.06%.
Goldman Sachs recently stated Ford shares haven't priced in a coming margin re-acceleration in the second half of 2012. Goldman raised its EPS estimates for the next three years. The firm sees capacity additions in North America which should alleviate constraints, share and pricing benefits from some new products, and easier commodity and hedging comparisons.
Ford has flirted with the $9 mark two times in the last two years and has always bounced back and moved higher. The global macro picture seems to be changing for the better with the ECB set to lay out a plan of action on Thursday. I don't see ford as a value trap. The risk/reward ratio is positive for the stock at this level. Any improvement in the macro state of affairs will spur the stock higher. Ford is not a value trap. The stock is a strong buy in the $9s.
Halliburton Company (HAL)
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Halliburton is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and has 29% upside potential based on the analysts' consensus mean target price of $43.41 for the company. Halliburton was trading Monday for $33.55, flat for the day.
Fundamentally, Halliburton has some positives. The company has a forward PE of 9.42. Halliburton pays a dividend with a yield of 1.07%. Halliburton's expected EPS growth rate for next five years is 20%. The current net profit margin is 11.87%. Halliburton's PEG ratio is .48 and its net profit margin is 11.34.
In a recent video from WSJ.com, Baker Avenue's Doug Couden says the best offense in this kind of market is a cyclical defense. Rather than sticking to the traditional favorites like consumer staples or utilities, which in the present environment are exposed to currency risk and higher input costs, he recommends looking at technology and oil service sector names where profit streams are more defensible. His picks current picks are Ebay (EBAY), Qualcomm (QCOM), Schlumberger (SLB) and Halliburton. Couden believes the recent margin compression experienced by HAL has subsided and found a bottom. I am in full agreement with him. I am long HAL and feel confident in my position. I believe the news out of the FED on Wednesday and The ECB on Thursday will bode well floor the stock. HAL is not a value trap at this level.
Conclusion
When something is on sale sometimes it's a real bargain and other times it's priced that way for good reason. Once in a while the low price of a stock is so enticing investors are blinded from the potential headwinds the company may be facing.
BAC's problems seem to be mounting rather than diminishing. I posit it is a value trap currently. BAC is definitely a battleground stock. Many people cite the fact that Warren Buffett invested in the company. I would as well if I got the deal he did. I would avoid BAC for the time being.
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.
Disclosure: I am long HAL.
