Seeking Alpha
Long/short equity, tech, banks, oil & gas
Profile| Send Message|
( followers)  

These five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 39% below their 52 week highs and have on average 32% 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.

Additionally, the five stocks are trading at or below $10. Stocks trading for $10 or less tend to be more volatile with high betas and frequent, large 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 $3 billion or greater. Stocks trading under $10 may provide more bang for your buck.

Finally, these stocks have some very positive fundamentals. Now, simply selecting $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.

We still need to attempt to distinguish the value trades from the 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 Wednesday's performance for the stocks.

(click to enlarge)

Alcoa, Inc. (AA)

(click to enlarge)

Alcoa is trading well below its consensus estimates and its 52 week high. The company is trading 44% below its 52 week high and has 27% potential upside based on the analysts' consensus mean target price of $10.68 for the company. Alcoa was trading Wednesday for $8.43, down under 1% for the day.

Fundamentally, Alcoa has several positives. The company has a forward P/E of 9.05. Alcoa is trading for 21 times free cash flow and approximately two thirds of book value. EPS this year is up over 100% while next year it is expected to rise by 155.17%. The company pays a dividend with a yield of 1.42%.

Alcoa beat earnings estimates last quarter. Alcoa observed robust showings across all its businesses compelled by higher utilization rates, process innovations, lower scrap rates and usage reductions. The company expects improved aluminum demand from automobile, aerospace, packaging and commercial transportation end markets.

Ford (NYSE:F) is taking one of the biggest gambles in its 108-year history. The company is developing a pickup truck with a largely aluminum body. The drastic redesign will help meet stringent federal fuel-economy targets. The shift to the lighter metal will cut the weight of its F-150 truck by about 700 pounds, according to Ford executives. If the plan works, this could be a major catalyst for Alcoa if other car makers follow suit. Alcoa is not a value trap.

Frontier Communications Corporation (FTR)

(click to enlarge)

Frontier is trading below its consensus estimates and its 52 week high. The company is trading 36% below its 52 week high and has 13% potential upside based on the analysts' consensus mean target price of $4.91 for the company. Frontier was trading Wednesday at $4.34, up nearly 11% for the day.

Frontier has some fundamental positives. The company is trading at 99% of book value, 84% of sales and has a forward P/E of $19.73. Frontier pays a dividend with a 9.22% yield, although the payout ratio may mean the dividends are unsustainable.

Frontier Communications second quarter EPS of $0.08 beat the streets estimates by $0.03. Revenue of $1.26B, down 5% year over year, beats by $20M. Free cash flow was $284.9M while net income came in at $75.3M. The company reiterated guidance for 2012 capital expenditures of $725M-$775M and free cash flow of $900M-$1B. Frontier staged a post-earnings rally, as investors focus on healthy free cash flow and broadband/TV net adds rather than expected wireline sub losses. Nomura has a Buy rating on the stock and is hiking its 2012 revenue forecast. Jefferies also has a Buy rating and notes Frontier's adjusted EBITDA margin hit a near-term high of 49.3%. Frontier has gapped up significantly. I would wait for the stock to cool off somewhat prior to starting a position. The stock is a buy.

Micron Technology Inc. (MU)

(click to enlarge)

Micron is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and 57% potential upside based on the analysts' consensus mean target price of $9.87 for the company. Micron was trading Wednesday for $6.27, up almost 1% for the day.

Fundamentally, Micron has some positives. Micron is trading for approximately 80% of book value and 76% of sales. EPS next year is expected to rise by 117%. Stifel Nicolaus reiterated their Buy rating on the stock on June 21st with a $9.50 price target.

Toshiba's (OTCPK:TOSBF) effort to lower NAND flash memory production has led to rising contract prices following huge first half declines. That's good news for Micron. Cirrus Logic's (NASDAQ:CRUS) guidance also bodes well for Micron suggesting Apple (NASDAQ:AAPL) is placing massive component orders ahead of upcoming product launches. The stock looks poised to run here.

SandRidge Energy, Inc. (SD)

(click to enlarge)

SandRidge is trading well below its consensus estimates and its 52 week high. The company is trading 44% below its 52 week high and has 42% upside based on the analysts' consensus mean target price of $9.75 for the company. SandRidge was trading Wednesday for $6.85, up slightly for the day.

Fundamentally, SandRidge has several positives. 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.

I am long and strong SandRidge into earning due out Thursday after the close. SandRidge is one of the biggest players in Kansas' oil and gas industry as it has scooped up about 1.7 million acres on the Mississippian Lime, an oil and gas play that stretches throughout the central U.S. Things look promising in Kansas. Kevin White, senior vice president for business development at SandRidge, says SandRidge's operations on the Mississippian are more mature in Oklahoma where the company is typically seeing a 100 percent return on investment over the life of a well. This news coupled with the rebound in natural gas prices bodes well for SandRidge. I'm in.

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 22% upside based on the analysts' consensus mean target price of $8.31 for the company. Xerox was trading Wednesday at $6.79, down over 2% for the day.

Fundamentally, Xerox is solid. The company is trading for less than its book value and has a forward PE of 5.80. Xerox sells for 8.33 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 2.30%.

Xerox continues to transform itself from a hardware company to a services firm in a move essential to the company's survival. The Company recently missed earnings and cut its full-year profit outlook on Friday after reporting lower second-quarter results. The company said it expected revenue to remain weak in its technology business. I have been positive on Xerox and had it on my watch list for some time now. After the last earnings results and accompanying guidance, I have to put it in the trap category for the foreseeable future. Avoid this one for now.

Conclusion

I am a contrarian investor at heart. I believe four of these stocks are contrarian buys that have major upside potential while Xerox looks like a trap.

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 most of these stocks should recover.

Market expectations are high for the European Central Bank to take decisive action to remedy the Eurozone's troubles Thursday. At the same time the Fed bolstered its stance regarding its willingness to employ another round of quantitative easing if necessary at its two day meeting which raped up Wednesday. As expected, no action was taken but stated that the economy had decelerated.

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.

Source: 5 Stocks Under $10 With Major Upside And Strong Fundamentals: 4 Trades And 1 Trap