When everybody thinks alike, Everyone is likely to be wrong.
The quote above is from Humphrey B. Neill, the author of "Art of Contrary Thinking." These stocks are all down significantly in recent days. Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When we see the vast majority of investors selling and the stock price going down it's hard not to go with the flow sell out and cut your losses.
Congruently, when you see a stock selling off its hard to buck up and start a position while everyone else is running for the exits. When the market provides opportunities to buy stock in sound companies at a discount, hopefully you have powder dry and can take advantage. To open a position you must have courage in your convictions and a long-term time horizon. Rome was not built in a day.
I have selected five companies to consider that may be contrarian buying opportunities. We will attempt to distinguish if these stocks are value trades or value 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 indeed contrarian buying opportunities.
The stocks selected are trading on average 37% below their 52-week highs and have 60% 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, potential growth catalysts and share prices trading at or below $10. Stocks trading for $10 or less tend to have higher betas and have larger percentage moves in the stock price relative to the market. This provides the opportunity for greater returns (or losses) relative to the market.
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 Thursday's performance for the stocks. The following charts are provided by Finviz.com.
Alcoa, Inc. (AA)
The company is trading 20% 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 Thursday for $8.76, up almost 2% for the day.
Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.60. Alcoa is trading for 67% of book value. The company pays a dividend with a yield of 1.40%. 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 broken trend and is trading below the 50 and 200-day moving averages. The recent upswing is positive.
If you are a long-term investor, this could be a chance to pick up Alcoa at its lows. The stock has consistently bounced off the $8.50 mark over the past year. With the recent tragic storm damaging a major portion of the Northeast, I see a pick-up in demand for Alcoa's products on the horizon. This is a buy opportunity at this level.
Bank of America Corporation (BAC)
The company is trading 6% below its 52-week high and has 5% potential upside based on a consensus mean target price of $10.00 for the company. BAC was trading Thursday at $9.53, up over 2% 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 9.71. BAC has a net profit margin of 6.08%. BAC is trading for approximately 42% of book value. EPS next year is expected to rise by 134% and the company pays a dividend with a yield of .43%.
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 recently bounced off the 20-day sma which has served as strong resistance for the last couple of months.
Bank of America now has a fortress balance sheet. I posit they will soon start returning capital to investors boosting the stock price. Additionally, although storms like Sandy are inherently tragic, the one bright spot is a boost to the economy during the recovery process. The rebuilding process should be beneficial to BAC as they should play a big part in financing the recovery. I like the stock here.
Micron Technology Inc. (MU)
The company is trading 37% below its 52 week high and 57% potential upside based on the consensus mean target price of $9.06 for the company. Micron was trading Thursday for $5.72, up over 5% for the day.
Fundamentally, Micron has some positives. Micron is expecting EPS to be up 350% 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 like it may have found a bottom. The stock has recently fallen through all major support levels but just broke back above the 20-day sma and is now trading 1% above it. This is the first sign of a trend reversal.
Micron's plan to acquire Japanese memory chipmaker Elpida took a major step toward completion after a Tokyo court approved the agreement and dismissed a rival proposal promoted by a group of bondholders, according to a recent Reuters report. Micron is trading for less than book value and has 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. The stock is a buy.
Nokia Corporation (NOK)
The company is trading 57% below its 52-week high and 8% above its consensus mean target price of $2.56 for the company. Nokia was trading Thursday for $2.80, up almost 5% for the day.
Fundamentally, Nokia has some positives. Nokia is trading for approximately 99% of book value, 25% of sales and has $3.12 in cash per share. EPS next year is expected to rise by 81%. Nokia pays a dividend with a 9.46% yield.
Technically, the stock has rebounded nicely since July and has established an uptrend. The stock is currently in a breakout position at the apex of a descending triangle. This is usually when a major breakout move will occur. Today's pop in the stock could be just the beginning of a larger move upward.
Nokia missed earning last quarter although there were some positive developments cited in the report. Nokia swung to profitability regarding operating income and revenues rose 3% year over year versus an 8% loss the previous quarter. Microsoft (MSFT) introduced the phone-sized version of its new Windows 8 operating system, the Windows Phone 8, on Monday at a San Francisco event. This bodes well for Nokia and should provide a boost to the bottom line. With a dividend yield of nearly 10%, the risk/reward ratio looks positive for the stock. Nokia is a buy here.
Vringo, Inc. (VRNG)
The company is trading 47% below its 52-week high and 228% above its consensus mean target price of $10.00 for the company. Vringo was trading Thursday for $2.79, up nearly 9% for the day.
Fundamentally, Vringo has some positives. Vringo's institutional transactions are up 135% in the past three months. The company has a gross margin of 74%.
Technically, the stock is stuck in a trading range between $3 and $6 with volatile swings from top to bottom of the trend channel. This is standard behavior for patent lawsuit plays.
Vringo is a patent play. Patent plays are not about the fundamentals, they are about winning a patent case. The stocks involved often have wild swings as motions and appeals are won and lost. A judge recently ruled Vringo could not collect damages on any years prior to the filing of the lawsuit. This limits a portion of the upside for Vringo.
Vringo is a speculative play, but is now trading at the bottom of the recent trend channel. If you were inclined to buy in to the story, now would be a most opportune time to do so. As I have stated previously, I believe a portion of a portfolio should be dedicated to speculation.
The Bottom Line
Whenever you find yourself on the side of the majority, it's time to pause and reflect. - Mark Twain
What a great quote from Twain. Let's reflect. A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities.
For example, pervasive cynicism about a stock or sector can drive the price so low that it exaggerates the investment's perils and belittles its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett. I believe these stocks may present such an opportunity.
Before buying any stock do your own due diligence first. If you do decide to start a position, 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.
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.