The market sold off 2% Wednesday with the Dow down 300 points posting the biggest single day drop in months. I posit the market had a broad based sell off for several different reasons. First, Obama won the election so bank and energy stocks sold off based on the perception that these sectors will continue to be overregulated. Second, European Central Bank President Mario Draghi said Wednesday morning risks to the Eurozone economy are on the downside. Third, Apple (AAPL) is dragging down the tech sector by officially hitting correction territory. Apple is down 20% from its near-term high of just over $700. Couple these concerns with the fact that the fiscal cliff is approaching rapidly and you have a recipe for a broad based market meltdown.
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. Wednesday's sell off was a case of the baby being thrown out with the bath water. Many solid stocks in great companies were sold off indiscriminately. Conversely, many stocks may have been sold off for good reason. The following is a review of five stocks I have been bullish on previously that were sold off Wednesday.
The following stocks were down from 3% to 7% Wednesday alone. The stocks selected are trading on average 26% below their 52-week highs and have 28% 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 $15. Stocks trading for $15 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 Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
Alcoa, Inc. (AA)
The company is trading 22% below its 52-week high and has 23% potential upside based on the consensus mean target price of $10.44 for the company. Alcoa was trading Thursday for $8.48, down almost 3% for the day.
Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.85. 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 has broken through all support levels and is currently trading 5% below the 50-day sma which is bearish.
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. 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, but I think it may test the $8 low set in July before the end of the year. $8 would be my entry point.
Bank of America Corporation (BAC)
The company is trading 8% below its 52-week high and has 8% potential upside based on a consensus mean target price of $10.04 for the company. BAC was trading Wednesday at $9.23, down over 7% 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 9.61. 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 was looking 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. What a difference a day makes. The stock took a 7% plunge and broke through initial support at the 20-day sma with no problem.
Bank of America now has a fortress balance sheet. I posit they will soon start returning capital to investors boosting the stock price. Additionally, the rebuilding process for the recent Northeast tragedy should be beneficial to BAC as they should play a big part in financing the recovery.
I posit the move down in the stock was the transitory traders hoping for a Romney victory selling out of their positions. I don't think this will be the last day for the banks to sell off. I would hold off on starting a position in BAC until support is tested and confirmed at the 50-day sma. The stock remains fundamentally intact and the pullback should be seen as a buying opportunity.
Ford Motor Co. (F)
The company is trading 13% below its 52-week high and has 29% upside based on the analysts' mean target price of $14.47 for the company. Ford was trading Wednesday for $11.06, down over 3% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 7.63. Ford is trading for 9.15 times free cash flow and two and half times book value. EPS next year is expected to rise by 13%. The company pays a dividend with a yield of 1.81% and has a PEG ratio of 0.47 and a net profit margin of 13.28%.
Technically, Ford is currently overbought due to an earnings beat. The stock has been in a solid uptrend since the last quarter. The stock has posted higher highs and higher lows since the start of August.
Mulally is staying around until 2014, sales and profits are up and the recent storm has not affected production. The stock remains a buy long-term. The stock has recently spiked due to an earnings beat. Nevertheless, today it held up extremely well. $11 may be a level of strong support. The stock is trading just 3% above the 200-day sma. Let's see if Ford tests the 200-day prior to starting a position.
Corning Inc. (GLW)
The company is trading 25% below its 52-week high and has 25% upside based on the consensus mean target price of $14.42 for the company. Corning was trading Wednesday for $11.51, down over 3% for the day.
The company has many fundamental positives. The company has a forward P/E of 8.53. Corning has a net profit margin of 25%. Corning trades for a 25% discount to book value. The company pays a dividend with a 3.13% yield. Corning is trading for 27 times free cash flow.
Technically, the stock looks vastly oversold. The stock was in a solid uptrend until the company missed earnings expectations in late October and went into a nose dive.
Corning reported a decline in revenue and profits were down markedly from the prior year. I feel Corning's valuation at this level is becoming interesting. The stock may test the year's low at $11 before the quarter is out. $11 would be my entry point. The stock is a buy long term.
Micron Technology Inc. (MU)
The company is trading 36% below its 52 week high and 55% potential upside based on the consensus mean target price of $9.06 for the company. Micron was trading Wednesday for $5.91, down almost 3% for the day.
Fundamentally, Micron has some positives. Micron is expecting EPS to be up 339% next year according to Finviz.com. Micron is trading for approximately 78% of book value and 73% of sales.
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 4% above it. The recent pullback was not enough to break the uptrend. Micron remains a buy at these levels.
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.
The Bottom Line
These stocks have been sold off. Yet, most still have strong fundamentals and solid growth stories. I see any pullback as a buying opportunity for the stocks. Nothing goes up in a straight line. The only caveat is to wait until the selling is done for each particular stock throughout the fourth quarter.
A market correction provides opportunity to buy great names at a discount price. Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you have powder dry and take advantage. The market is clearly at an inflection point. To open a position you must have courage in your convictions. Do your own homework and take your time building a full position.
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.