"Price is what you pay, value is what you get." - Warren Buffett
I have selected five companies moving on recent news to review. In this article we will 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 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 value trades or buying opportunities. In the following sections we will attempt to discern if these stocks are value trades or value traps.
All the stocks selected for review are trading at multi-year lows, some are trading significantly below their 52-week highs and some have major upside potential based on analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities.
Additionally, the five stocks have some positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. Finally, these are stocks with market caps of $2 billion or greater.
In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to stay with the position or sell out. The following table depicts summary statistics and Friday's performance for the stocks. The following charts are provided by Finviz.com.
Advanced Micro Devices, Inc. (AMD)
The company is trading 62% below its 52-week high, and has 44% upside potential based on a consensus mean target price of $4.65. AMD was trading Tuesday for $3.22, flat for the day and 4% above its 52-week low.
Fundamentally, AMD has some positives. AMD's EPS is expected to grow by 31% next year. AMD trades for 6.70 times free cash flow. The company has a forward P/E of 9.47. Insider ownership is up 81% over the last six months. On the other hand, sales and EPS are down 10% and 40%, respectively, quarter over quarter. ROE is negative 45.61%, and the company sports a -10% net profit margin.
Technically, AMD's chart is the definition of a falling knife. The stock is in a well-defined downtrend. The stock is nearing oversold territory with a RSI of 35, 30 or less is considered oversold.
I can't take AMD out of the penalty box. Avoid the stock. The recent news out of Hewlett-Packard Company's (HPQ) analyst day did not help AMD's situation. Meg Whitman lowered 2013 guidance. I don't see a near term catalyst for AMD. The stock is a value trap.
Frontier Communications Corporation (FTR)
The company is trading 17% below its 52-week high and has 7% upside potential based on consensus mean target price of $5.11 for the company. Frontier closed Friday at $4.77, up slightly for the day.
Frontier has some fundamental positives. The company is trading at 1.10 times book value, 93% of sales and has a forward PE of $17.67. Frontier pays a dividend with an 8.39% yield and is turning a profit.
Technically, FTR is currently in an uptrend. The stock just pulled back and bounced off support at the 50-day sma which is bullish. The shares are still trading at multi-decade lows and the stock was recently upgraded. The stock recently fulfilled the coveted golden cross where the 50-day sma crosses above the 200-day sma. This is a very bullish sign and one of my buy indicators.
In my last article I suggested you wait for a pullback to start a position, and that pullback has occurred. The stock looks good here, especially with an 8% dividend to boot. FTR is a value trade.
Nokia Corporation (NOK)
The company is trading 61% below its 52-week high and 13% above its consensus mean target price of $2.33 for the company. Nokia was trading Friday for $2.68, up 1.5% for the day.
Fundamentally, Nokia has some positives. Nokia is trading for approximately 86% of book value and only 23% of sales. EPS next year is expected to rise by 83%. Nokia pays a dividend with a 9.43% yield.
Technically, the stock has rebounded nicely since July and is currently in the beginnings of establishing an uptrend. The stock is currently in breakout position. The stock is at the apex of a descending triangle position. This is usually when a major breakout move will occur.
With a dividend yield of nearly 10%, the stock looks attractive at this level. The risk/reward ratio looks positive for the stock here. Nokia has Microsoft (MSFT) backing them and pays a dividend with a 10% yield. Nokia is a value trade.
SIRIUS XM Radio Inc. (SIRI)
The company is trading 2% above its 52-week high and has 8% upside potential based on consensus mean target price of $2.91 for the company. SIRIUS was trading Friday for $2.69, down slightly for the day.
Fundamentally, SIRIUS has several positives. SIRIUS has a forward P/E of 24 and trades for 27 times free cash flow. EPS is expected to rise by 27% over the next five years. Quarter over quarter EPS is up tremendously. SIRIUS' TTM ROE is 152% and the company's net profit margin is 107%.
Technically, the stock looks strong. The stock achieved the golden cross about two months ago. This indicator has proven to be extremely bullish. The stock has just made another 52 week high and recently broken above the long-term upper trend line.
Bank of America recently initiated coverage on SIRI with a Buy rating causing the stock to spike. The recent news of strong car sales should keep the stock moving higher. I'm staying long. The next catalyst for another leg higher should be 2013 guidance. I am staying long. With profit margins and cash flow so high, I can't see how they would announce some type of stock buyback program or initiate a dividend. The stock is a value trade.
Zynga, Inc. (ZNGA)
Zynga is down 46% since my recommendation to sell the stock on July 17th. The company is trading 85% below its 52-week high, and has 92% potential upside based on the analysts' mean target price of $4.76. ZNGA was trading Friday for $2.48, down over 12% for the day.
Fundamentally, ZNGA has a few positives. EPS is expected to grow by 60% next year and 24% over the next five years. The stock is trading for book value, and has a forward P/E of 28.
Technically, the stock is the definition of a falling knife. The stock has been trading sideways since late July and just took another huge drop down. There are no positives regarding Zynga's technical state.
I would avoid the entire sector until the winners and losers are ultimately decided. It took several years for dot com winner and losers to shake out. Zynga's falling sales revenue leads me to believe Zynga may be one of the losers. I would not touch this stock with a barge pole. The stock is a value trap.
The Bottom Line
"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." - Warren Buffett
You never hear this quote from Buffett much. It is my main mantra. You can't depend on analysts estimates or the noise of the crowd to make your decisions for you. Take everything in, process the information and make your own determinations to buy or sell. Analyst upgrades and downgrades are usually way behind the curve. If a trade is crowded, all the easy money has most likely already been made. You have to think outside the box to make money.
Sometimes a stock is down for good reason and sometimes it's a screaming buy. Take your time, do your homework, invest in things you know, don't pay attention to the daily noise and you should do just fine. If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk. You can also set a 5% trailing stop loss order if you wish to minimize losses even further.
Disclosure: I am long SIRI.
Additional disclosure: 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.