A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. - Wayne Gretzky
This is a great quote from Gretzky. I believe it pertains to the current situation in the equity markets. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most likely end up on the wrong side of the trade.
Stocks are currently out of favor. The market began to drop precipitously Friday as stocks recorded their worst one-day fall in nearly four months. Disappointing quarterly reports were telling of a sluggish global economy and drove the markets even lower on Tuesday. I see any sell off as a buying opportunity. The market always bounces back. This is a buy on the dip scenario. Let's not forget, the world's central banks have been taking action and the Bernanke put is in place. I have chosen five blue chip stocks I feel have notable upside long-term to analyze.
The stocks covered in this article are considered blue chip stocks. According to the New York Stock Exchange, a blue chip is a stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. These five blue chip stocks are down in recent days along with the rest of the market. Nevertheless, they all have prospects for future growth, good fundamentals and are profitable.
The question is... is it really time to buy? In the following sections we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any up or downside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Tuesday's performance for the stocks.
Bank of America Corporation (BAC)
The company is trading 8% below its 52-week high and has 6% potential upside based on a consensus mean target price of $9.47 for the company. BAC was trading Tuesday at $9.31, down over 1% for the day.
Fundamentally, BAC has several positives. BAC insider ownership has increased by 66.39% over the past six months. The company has a forward P/E of 10.16. BAC has a net profit margin of 6.08% and a PEG ratio of 1.38. BAC is trading for approximately 43% of book value. EPS next year is expected to rise by 130% and the company pays a dividend with a yield of .42%.
Technically, BAC looks good. The stock broke out of a descending triangle to the upside at the beginning of August. The coveted golden cross was fulfilled earlier this year. The stock has pulled back to just above the 20-day sma which has served as strong resistance for the last couple of months.
Bank of America beat earnings estimates and reported third-quarter 2012 net income of $340 million on Wednesday the 17th; you can read the transcript here. This is a long-term call. Bank of America now has a fortress balance sheet. I posit they will soon start returning capital to investors boosting the stock price. I like the stock here.
Citigroup, Inc. (C)
The company is trading 5% below its 52-week high and has 15% potential upside based on a consensus mean target price of $42.52 for the company. Citigroup was trading Tuesday at $35.52, down over 2% for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 8.22. Citigroup is trading for 59% of book value. Citigroup insider ownership has increased by 20.54% over the past six months. The company has a PEG ratio of 1.51 and a net profit margin of 10.95%.
Technically, the stock looks great. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since mid-July. It has been on fire so the recent period of back and filling was completely logical. If you look at the chart, Citigroup just fulfilled the golden cross where the 50-day sma crosses above the 200-day sma. This is precisely the time to buy the stock.
Citigroup beat earnings estimates and reported third-quarter 2012 net income of $468 million on Monday the 15th; you can read the transcript here. This is a long-term call. Citigroup had a major shakeup in top management with the CEO stepping down right after earnings. I feel the move will be a good one for Citigroup. The new CEO, Mike Corbat, has three decades of experience with Citigroup. He may provide the extra push that is needed to get Citigroup firing on all cylinders again. I like the stock here.
Cisco Systems, Inc. (CSCO)
The company is trading 14% below its 52 week high and has 21% potential upside based on the consensus mean target price of $21.82 for the company. Cisco was trading Tuesday at $18.01, down almost 1% for the day.
Fundamentally, CSCO looks solid. Cisco's quarter over quarter EPS and sales growth rates are 5% and 60% respectively. Cisco's net profit margin is 17.46%. Cisco has a dividend with a yield of 3.08%. The company is trading at 10.88 times free cash flow.
Technically, Cisco is has been performing well since bouncing off a low of 15 in late July. The stock has posted higher highs and higher lows since that time.
The stock just achieves the golden cross which is bullish. Nonetheless, the stock has broken through support at the 50-day in recent days. It looks like it wants to close the gap at 17.60. I would wait for a little more downside prior to starting a position.
I posit the need for security improvements as the growth of people transacting on their mobile devices will soon outweigh the impact of an economic downturn. Who knows - maybe Europe will even start to turn around. Cisco's issues are transitory.
Ford Motor Co. (F)
The company is trading 22% below its 52-week high and has 40% upside based on the consensus mean target price of $14 for the company. Ford was trading Tuesday for $10.01, down 1.60% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 6.92. Ford is trading for 8.41 times free cash flow and 2.29 times book value. EPS next year is expected to rise by 17%. The company pays a dividend with a yield of 1.97% and has a PEG ratio of 0.30 and a net profit margin of 13.27%. Ford insider ownership has increased by 9.01% over the past six months.
Technically, Ford looks good. The stock is up over 10% since my last recommendation to buy at the $9 low. The stock has posted higher highs and higher lows since the start of August. The stock is trading on par with the June lows. The stock is resting just above the bottom of the current uptrend channel which is a good time to start a position.
Ford is one of my favorite stocks. Nevertheless, the recent news that sales were flat due to poor sales of trucks leads me to believe they will have another disappointing earnings report. I would layer in to the position. I would start a quarter position now and wait for earnings to be announced.
Annaly Capital Management, Inc. (NLY)
Annaly is trading 9% below its 52-week high and has 5% upside based on the consensus mean target price of $16.56 for the company. Annaly was trading Tuesday for $15.79, down almost 1% for the day.
Fundamentally, Annaly has several positives. The company has a forward P/E of 8.66. Annaly is trading for 10 times free cash flow and a 5% discount to book value. The company pays a dividend with a yield of 12.55% and has a net profit margin of 9.50%. Annaly insider ownership has increased by 10% over the past six months.
Technically, Annaly looks bleak. The stock was posted higher highs and higher lows since the start of April, but has dropped precipitously since the start of October. I think it has found support and a bottom at the 200-day sma. This is the level I was looking for to start a position in the name.
Annaly was upgraded to Buy from Neutral at Compass Point following last night's buyback announcement, "a smart reallocation of capital and a floor for the share price." Noting like high prepayment rates, Compass Point says the Fed's continued bid for MBS should keep book values for Annaly strong.
Annaly's judicious management of asset choice, liability management and business growth has produced substantial returns for investors. The majority of returns come from dividend income. Since its IPO in 1997, Annaly has paid out over $8 billion in dividends to shareholders. The U.S. Housing market is on the comeback trail and Annaly is a buy here.
The Bottom Line
I posit these stocks present excellent buying opportunities. The potential is great for them to rebound significantly from current levels as the markets gain their footing. Markets incessantly gyrate, the only constant is the fact that they have always gone up over the long haul. These are long-term investments.
If you try to trade the market during these volatile times, you will most certainly get crushed. The risk reward ratio for a long position in these stocks is currently favorable. The only caveat is this is a long term investment, not a trade. There will be more volatility for these stocks going into the end of the year.
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 and setting a 5% trailing stop loss to minimize losses even further if you wish.
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.