5 Turnaround Plays With Over 30% Upside Trading Under $5 To Consider

by: David Alton Clark

The Gist

These five companies are trading well below their consensus estimates and 52-week highs. The companies are trading on average 47% below their 52-week highs and have on average 32% upside based on consensus mean target prices. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities.

Additionally, the five stocks are trading below $5. Stocks trading for $5 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 $2 billion or greater. Stocks trading under $5 may provide more bang for your buck.

Finally, these stocks each have some very specific positive fundamentals. Now, simply selecting $5 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 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 catalyst for growth. The stock traps investors when they buy into the company at low prices and the stock never recovers. Sometimes stocks are down for good reason. Sector, industry or company specific headwinds may be so strong and prevalent the company may never recover.

On the other hand, value trades are companies where pervasive cynicism about a stock or sector has driven the price so low that it exaggerates the investment's perils and belittles its future prospects. These are truly diamonds in the rough opportunities.

The Goods

In the following section, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.

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Alcatel-Lucent, S.A. (ALU)

The company is trading 64% below its 52-week high and has 30% upside potential based on the analysts' mean target price of $1.56 for the company. ALU was trading Wednesday for $1.20, up almost 4% for the day.

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Fundamentally, ALU has some positives. EPS growth for this year and next year expected to rise by over 200% according to Finviz.com. ALU is trading for approximately 60% of book value and has a PEG ratio of 1.56. On the negative side, the company's sales are down 7% quarter over quarter. The company has a meager net profit margin of just over 1%; an ROE of only 5% and EPS is dropping drastically quarter over quarter.

Technically, ALU may have turned the corner though. All the major moving averages are sloping downward, but the stock has rallied back and closed nearly 4% above the 20-day SMA. The company recently climbed over 20% off its 52-week low of 99 cents. The stock continued its upward thrust and breached the 20-day SMA, which is the first step in fulfilling a trend reversal pattern.

The risk reward ratio is favorable at this point, I can get behind ALU because they have a positive catalyst, have bounced off their lows and the fundamentals are improving.

Advanced Micro Devices, Inc. (AMD)

The company is trading 53% below its 52-week high, and has 40% upside potential based on a consensus mean target price of $5.44. AMD was trading Wednesday for $3.89, up almost 4% for the day. AMD was up significantly in the last two days ostensibly due to the impending product launches of tech giants Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT).

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Fundamentally, AMD has some positives. AMD's EPS is expected to grow by 42.86% next year. AMD trades for 8.10 times free cash flow. The company has a forward P/E of 9.73. Insider ownership is up 90% over the last six months. There is an old saying about insider buying. There are many reasons insiders sell and only one reason they buy, the stock is going up. On the other hand, sales and EPS are down 10% and 40% quarter over quarter. ROE is negative 45.61% and the company sports a -10% net profit margin.

Technically, AMD's chart still looks terrible, but the recent uptick is positive. The stock is in a well-defined downtrend; nevertheless, this is the first sign of a bottom. The stock has breeching the first level of resistance at the 20-day SMA. I can't take AMD out of the penalty box just yet, but the last few days look promising. Avoid the stock for now.

Frontier Communications Corporation (NYSE:FTR)

The company is trading 25% below its 52-week high and has 3% upside potential based on consensus mean target price of $5.01 for the company. Frontier closed Wednesday at $4.85, up almost 2% for the day.

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Frontier has some fundamental positives. The company is trading at 1.12 times book value, 95% of sales and has a forward PE of $17.96. Frontier pays a dividend with an 8.25% yield.

Technically, FTR is on the cusp of being oversold. Look, I've been behind the stock since the shares were at $3 in mid-May. Nonetheless, the shares are still trading at multi-decade lows and the stock was recently upgraded. The stock has been in a well-defined uptrend since the start of May. The stock just ripped higher recently. I would wait for the stock to cool down a bit prior to starting a position. The cost basis of your shares is one of the primary determinants of your potential return.


I am long SIRIUS at a cost basis of $2.09. The company is now trading up 16%. The company is trading 8% below its 52-week high and has 15% upside potential based on consensus mean target price of $2.80 for the company. SIRIUS was trading Wednesday for $2.43, down 3% for the day on a recent downgrade.

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Fundamentally, SIRIUS has several positives. SIRIUS has a forward P/E of 22 and trades for 18 times free cash flow. EPS for the past five years has risen by 365 and is expected to rise by 25% over the next five years. Quarter over quarter EPS is up tremendously. SIRIUS' TTM ROE is 151% and the company's net profit margin is 107%.

The stock just achieved the golden cross where the 50-day SMA crosses above the 20-day SMA. This is considered extremely bullish. On top of that profits are up huge and the company's cash flow continues to increase. A stock buyback and/or a dividend is in the cards. You have to see the forest through the trees. Don't let the SMAll day to day moves distract you from the heart of your thesis.

Zynga, Inc. (ZNGA)

The company is trading 81% below its 52-week high, and has 71% potential upside based on the analysts' mean target price of $5.26. ZNGA was trading Wednesday for $3.07, up over 10% for the day.

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Fundamentally, ZNGA has a few positives. EPS is expected to grow by 57.10% next year and 25% over the next five years. The stock is trading for 1.25 times book value, and has a forward P/E of 27.91.

Technically, the stock has been the definition of a falling knife until Zuckerburg spoke well of them at the TechCrunch conference. Zuckerburg made some good points regarding the company's prospects. Even so, I can't get behind the name just yet. The potential for another disrupter entering the picture is too risky. Give this one some time to prove itself. Right now, it seems like key executives are dropping like flies.

The Bottom Line

The geopolitical and macroeconomic issues of the eurozone, U.S. and the world will always be there. Once market participant's fears fade, a renewed focus on fundamentals and company specific catalyst will emerge which bodes well for these stocks.

Market expectations are high for the European Central Bank to take decisive action regarding any future eurozone troubles. At the same time the many believe the Fed is set to bolster its stance regarding its willingness to employ another round of quantitative easing if necessary later today.

A few of these stocks have upcoming catalysts and strong stories that will move share prices up significantly. On the other hand, the time may not be right to start a position in others. If you choose to start a position, take your time and build a position by layering into it. This will help to reduce risk. Set a stop loss order if you are concerned that the stock may not hold.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.