These five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 65% 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.
Additionally, some these stocks recently beat earnings expectations while some did not. The next step is to distinguish the value trades from the traps. A value trap is a stock that appears to be a bargain based on fundamentals or the fact it is down significantly 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 signaling the stocks are value trades or traps. Additionally, we will determine if a catalyst for growth exists based on sector, industry or company specific developments. The following table depicts summary statistics and Thursday's performance for the stocks.
Alpha Natural Resources, Inc. (ANR)
ANR is trading well below its consensus estimates and its 52 week high. The company is trading 85% below its 52 week high and has 106% upside potential based on the analysts' consensus mean target price of $17.33 for the company. ANR was trading Thursday for $6.56, down almost 5% for the day.
Fundamentally, ANR has some positives. EPS for the next five years is expected to rise by 20%. ANR is trading for approximately one fifth of book value. Insider ownership is up 33% over the past six months and the company's sales are up 71% quarter over quarter. On the negative side, the company has a net profit margin of -10%; a negative ROE and EPS is dropping over 100% quarter over quarter.
Technically, ANR is nose diving with no relief in sight. ANR was the S&P 500's biggest decliner Thursday as the coal company discloses that on July 25 a subsidiary received an imminent danger order for one area of its Eagle Butte Mine in Wyoming. More likely, shares are simply giving back much of Friday's outsized 20% gain on Arch Coal's better than expected Q2 report.
Although the risk reward ratio may be favorable at this point, I can't get behind ANR until I see some improvement in the fundamentals and technicals. I haven't heard any new of a positive catalyst out of the company either. ANR is a value trap here.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport is trading well below its consensus estimates and its 52 week high. The company is trading 38% below its 52 week high and has 48% upside potential based on the analysts' consensus mean target price of $47.86 for the company. Freeport was trading Thursday for $32.55, down almost 3% for the day.
Fundamentally, Freeport has several positives. The company has a forward P/E of 6.95. Freeport is trading for slightly less than two times book value. EPS next year is expected to rise by 41.76%. The company pays a dividend with a yield of 3.73% and has a net profit margin of 21.98%. On the negative side, sales and EPS down quarter over quarter 23% and 48% respectively.
Freeport met expectations for the second quarter on revenues and beat expectations on earnings per share. The stock has been moving sideways and consolidating at this level for months now. The risk/reward ratio on the stock favors long trades. This is a long term call. I like the stock here.
First Solar, Inc. (FSLR)
FSLR is trading well below its consensus estimates and its 52 week high. The company is trading 85% below its 52 week high and has 31% upside potential based on the analysts' consensus mean target price of $23.63 for the company. FSLR was trading Thursday for $17.93, up over 21% for the day.
Fundamentally, FSLR has some positives. The company has a forward P/E ratio of 3.88. EPS for the next five years is expected to rise by 21%. FSLR is trading for approximately one half of book value. On the negative side, the company has a negative net profit margin of 22.44%, negative sales and EPS growth quarter over quarter and insider ownership is down nearing 100% over the last six months.
Technically, the stock may have turned the corner and bottomed. The stock bounced off a 52 week low of $11.43 in June and has been climbing higher ever since.
First Solar skyrocketed over 21% Thursday after a strong Q2 report that featured improving margins and receivables. Four firms are upgrading - among them is Cantor, which is now more confident about FSLR's ability to transition to a construction-focused business model. However, Deutsche and Needham express worries about the profitability of construction deals and ongoing weakness in sales for 3rd-party installations. 55.8% of FSLR's float was shorted as of July 13. This one may be set to permanently reverse course. I would hold off on starting a position until the stock cools down after such a huge pop prior to starting a position. Wait a week and see where the stock is trading. I like the added upside from a potential short squeeze play.
Hewlett-Packard Company (HPQ)
HPQ is trading well below its consensus estimates and its 52 week high. The company is trading 50% below its 52 week high and has 48% potential upside based on the analysts' consensus mean target price of $25.92 for the company. HPQ was trading Thursday for $17.55, up slightly for the day.
HPQ fundamentals are mixed. The company has a forward PE of 4.04. HPQ is trading only 9.13 times free cash flow. HPQ pays a dividend with a nearly 3% yield. On the other hand, EPS for the next five years is expected to only rise by 5.5%. Sales and EPS are down quarter over quarter and the company's net profit margin is a measly 4%.
Now that Amazon (AMZN), Google (GOOG), Microsoft (MSFT), and others have rolled out cloud storage services, HPQ has decided to offer one as well. HP Cloud Object Storage, which runs on the OpenStack platform, relies heavily on partnerships to make up for a lack of scale. It's accompanied by a content delivery network service leveraging Akamai's (AKAM) network. Forrester's Andrew Reichman is critical of the solution's focus on price-sensitive service providers.
This just goes to show how HPQ is behind the curve at every turn these days. My position on the stock remains unchanged. Even though the stock is down significantly, an upside catalyst is nowhere in sight. HPQ is a value trap at this juncture. Even the CEO stated it would take years to turn the company around.
Netflix, Inc. (NFLX)
Netflix is trading well below its consensus estimates and its 52 week high. The company is trading 80% below its 52 week high and has 43% potential upside based on the analysts' consensus mean target price of $76.86 for the company. Netflix was trading Thursday for $53.87, down over 1% for the day.
Fundamentally, Netflix has few positives. Quarter over quarter sales are up 20% but EPS is down over 100%. EPS next year is expected to rise substantially and the ROE is 19.42%. Netflix's profit margin is a thin 2.87% and
The stock has been taken to the proverbial woodshed after the recent earnings miss. Netflix is starting to see a big drop in streaming usage since the London Olympics began last weekend. Though CEO Reed Hastings warned the Games would be a negative factor during the firm's fiscal second quarter conference call, the impact appears to be even more significant than forecast.
I was hoping for some type of bounce back after the huge sell off to confirm a bottom in the stock but that didn't happen. With the new bad news about streaming usage, I would avoid the stock for now. Avoid Netflix until the story changes for the positive.
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. There needs to be some type of catalyst combined with improving fundamentals and technicals in order to confirm the bleeding has stopped. Then start a position.
A discount to analysts' estimates is a good starting point when seeking value, yet you have to dig deeper and make your own conclusions. It doesn't matter where a stock's price has been, it matter where it is going. If a stock is priced at $40 and you paid $30 but it is only really worth $20, you still paid $10 too much.
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.