5 Buys Under $10 With 30% Upside On Average Trading Near Multi-Year Lows

Includes: AA, ANRZQ, MU, SD, SIRI
by: David Alton Clark

The Gist

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett

What a great Buffett quote. 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 lose money.

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 have been telling of a sluggish global economy which drove the markets even lower Tuesday and Wednesday.

Nevertheless, I see the 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 firmly in place until 2015 as confirmed by the Fed Wednesday. I have chosen stocks I feel have notable upside long-term but are out of favor currently.

The Goods

The stocks selected are trading on average 37% below their 52-week highs and have 32% upside potential based on analysts' estimates. Micron Technology Inc. (NASDAQ:MU) has the most upside trading at a 71% discount to its mean price target of $9.02. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities. SIRIUS XM Radio Inc. (NASDAQ:SIRI) has the least upside trading at a 7% discount to its mean price target of $3.12.

Additionally, the five stocks have some positive fundamentals, potential growth catalysts and share prices trading at or below $10. Stocks trading for $10 or less often have high betas. These stocks have an average beta of nearly 2. Stocks with high betas tend to be more volatile with frequent, larger percentage moves in the stock price as compared to the market indices. This provides the opportunity for greater returns (or losses) relative to the market or more bang for your buck if you will.

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 Wednesday's performance for the stocks. The following charts are provided by Finviz.com.

Alcoa, Inc. (AA)

The company is trading 24% below its 52-week high and has 19% potential upside based on the consensus mean target price of $10.44 for the company. Alcoa was trading Wednesday for $8.69, down over 1% for the day.

Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.91. Alcoa is trading for 69% of book value. The company pays a dividend with a yield of 1.37%. Alcoa's projected EPS growth rate for next year is 162%.

Technically, the stock had been in a short-term uptrend since mid-July. The stock broke out to the upside in a parabolic move at the start of September. The stock has pulled back to the bottom of the uptrend channel and is consolidating. The 50 and 20 day smas remain in an upward trend.

Alcoa beat earnings estimates last quarter. Alcoa reported a loss from continuing operations of $143 million, or $0.13 per share; excluding special items, income from continuing operations of $32 million, or $0.03 per share. You can read the transcript here. If you are a long-term investor, this could be a chance to pick up Alcoa near its lows. Eight dollars seems to be the bottom for this stock. I see this as an excellent buying opportunity.

Alpha Natural Resources, Inc. (ANR)

ANR is trading 70% below its 52-week high and has 16% upside potential based on the consensus mean target price of $10.33 for the company. ANR was trading Wednesday for $8.70, down almost 4% 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 a 60% discount to book value. The company's sales are up 16% quarter over quarter. On the negative side, the company has a net profit margin of -36%; a negative ROE of -43.57% and EPS is dropping substantially quarter over quarter.

Technically, ANR looks strong. Alpha has a beta of 1.67. Alpha just broke out of a long term downtrend. The stock has breached major long-term resistance at the $9 mark but has fallen back in the past few days. The risk/reward ratio seems favorable at this point. This could be the biggest opportunity. Set a stop loss and layer in if you start a position. I like it here.

I chose Alpha Natural Resources, Inc. and have started a position in the stock. The stock seems to provide the most bang for your buck based on a high risk equals high reward basis. The stock has been beaten down and is currently trading at a 60% discount to book value. ANR is up over 30% for the quarter. ANR has a beta of 1.67. Alpha just broke out of a long term downtrend. I like it here.

Micron Technology Inc.

The company is trading 43% below its 52 week high and 71% potential upside based on the consensus mean target price of $9.02 for the company. Micron was trading Wednesday for $5.22, down almost 4% for the day.

Fundamentally, Micron has some positives. Micron is expecting EPS to more than triple next year according to Finviz.com. Micron is trading for approximately 71% of book value and 67% of sales. Stifel Nicolaus reiterated its Buy rating on the stock on Sept 24th and raised their price target to $10.

Technically, Micron looks broken. The stock has fallen through all major support levels and is trading 23% below the 200-day sma. The stock is testing the multiyear low of $5.00 set back in October of last year.

Micron went on a major run of 45% last year at this time. The stock is trading for less than book value and have a significant opportunity to turn the ship around if they can complete the purchase of Elpida. I believe the risk/reward is favorable for the longs here with the stock so close to multi-year lows.

SandRidge Energy, Inc. (NYSE:SD)

SandRidge is trading 28% below its 52-week high and has 48% upside based on the consensus mean target price of $9.66 for the company. SandRidge was trading Wednesday for $6.44, up slightly for the day.

Fundamentally, SandRidge has several positives. SandRidge is trading 1.15 times book value. SandRidge has a net profit margin of 59.29%. EPS next year is expected to rise by 27%. Quarter-over-quarter sales and EPS growth are up 31% and 265%, respectively.

Technically, the stock has been in a well-defined trading range between $6 and $7 for the past few months. The stock broke out above the $7 mark and 200 day SMA at $7.20, but pulled back recently and fallen through support.

Weakness in the oil markets brought on by talk of sluggish global growth and calming nerves in the Middle East have taken their toll on oil stocks as of late.

Nevertheless, this is an excellent buying opportunity. Tom Ward is turning this company into a profit machine. SandRidge has made the investments and over the next three years, it should capitalize on them. Ward's plan is to triple EPS in the next few years. I like the stock here.

SIRIUS XM Radio Inc.

The company is trading 2% below the 52-week high and has 7% upside potential based on consensus mean target price of $3.12 for the company. SIRIUS was trading Wednesday for $2.89, up nearly 1% for the day.

Fundamentally, Sirius has several positives. Sirius has a forward P/E of 29 and trades for 29 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 just made another 52-week high and recently broken above the long-term upper trend line.

The big news is Chief Executive Officer Mel Karmazin is stepping down on Feb. 1 after clashing with John Malone who plans to take control of the satellite-radio operator. With the recent run in the stock and the recent loss of Mel, I have taken profits in my SIRI position at this time. I see some near term headline risk related to the current situation. This may provide an opportunity to get in at a lower price point. I like the stock long-term and am waiting for earnings for a chance to buy back in.

The Bottom Line

I posit, given time, the Fed's QE and other stimulus procedures will begin to spark economic growth and the markets will continue the upward trend. Alcoa, SandRidge and Alpha Natural Resources are buys I like right now for that reason. Searching for buying opportunities in the market takes time. Sometimes stocks are down for unjust causes and sometime they are down for good reason. Even if you do find one that is being sold off due to a macro-economic issue, who is to say it will not continue to be sold off?

Take your time and do your own due diligence. 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. Build the position slowly. You can also set a 5% trailing stop loss order if you wish to minimize risk further.

Disclosure: I am long ANR. 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.

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.