5 Stocks Trading Under $10 With Strong Upside Testing Lows

Includes: AA, BAC, MU, SD, XRX
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

I love this quote from Buffett. I believe it pertains to the current situation regarding these stocks. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most certainly lose money. These stocks are currently out of favor. Some may be for good reason based on the current macro environment. The Dow broke its current four-day losing streak closing Friday up 45 points. Investors were invigorated over the positive "fiscal cliff" comments coming out of Washington. Nonetheless, the Dow still logged its longest weekly losing streak with four in a row. The Nasdaq was down for the sixth consecutive week posting its longest losing streak in over three years.

The market began to drop precipitously in the last few weeks as it reacted to several major negative macroeconomic and geopolitical developments from the usual suspects, U.S. budget issues, the European sovereign debt debacle and Middle East unrest. Moreover, disappointing quarterly reports are telling of a sluggish global economy which drove the markets even lower.

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. 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 32% below their 52-week highs and have 40% upside potential based on analysts' estimates. Micron Technology Inc. (NASDAQ:MU) has the most upside trading at a 66% discount to its mean price target of $9.04. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities. Bank of America Corporation (NYSE:BAC) has the least upside trading at an 11% discount to its mean price target of $10.13.

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 two. 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 providing 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 Friday's performance for the stocks. The following charts are provided by Finviz.com.

Bank of America Corporation

The company is trading 10% below its 52-week high and has 11% potential upside based on a consensus mean target price of $10.04 for the company. BAC was trading Friday at $9.12, up slightly for the day.

Fundamentally, BAC has several positives. BAC insider ownership has increased by 51% over the past six months. The company has a forward P/E of 9.40. BAC has a net profit margin of 6.08%. BAC is trading for approximately 41% of book value. EPS next year is expected to rise by 131% and the company pays a dividend with a yield of .44%.

Technically, BAC has been 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. Yet the stock has pulled back significantly recently. The stock has dropped nearly 10% since the start of November.

Bank of America now has a fortress balance sheet. I posit the move down in the stock was the transitory traders hoping for a Romney victory selling out of their positions. In my earlier missive regarding the stock I suggested waiting until the 50-day sma support level was tested and confirmed. We are now at that level. If the stock is able to break back above the 50-day sma I would be a buyer. The stock remains fundamentally intact and the recent pullback is a buying opportunity.

Micron Technology Inc.

The company is trading 40% below its 52 week high and 66% potential upside based on the consensus mean target price of $9.04 for the company. Micron was trading Friday for $5.47, flat for the day.

Fundamentally, Micron has some positives. Micron is expecting EPS to be up 348% next year according to Finviz.com. Micron is trading for approximately 72% of book value and 68% of sales. Micron insider ownership has increased by 45% over the past six months.

Technically, Micron is in a long-term downtrend. Nevertheless, the stock may have found a bottom. The stock has tested the $5.50 mark four times this year and bounced back higher each time.

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. The completion of the purchase should enhance the company's fundamentals and competitive edge. I believe the risk/reward is favorable for the longs here with the stock trading just above this year's low. The stock is a buy here.

Alcoa, Inc. (AA)

The company is trading 24% below its 52-week high and has 22% potential upside based on the consensus mean target price of $10.44 for the company. Alcoa was trading Friday for $8.18, up almost 2% for the day.

Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.03. Alcoa is trading for 64% of book value. The company pays a dividend with a yield of 1.47%. Alcoa's projected EPS growth rate for next year is 162%.

Technically, the stock has broken through all support levels and is currently trading 8% below the 50-day sma which is bearish. On the other hand, the risk/reward may favor long trades at this point with the stock testing the lows for the year at the $8 mark.

As stated in my previous missive regarding the stock, the $8 mark would be my entry point. If you are a long-term investor, this could be a chance to pick up Alcoa at its lows. The stock bounced off $8.00 in July and had a significant run to nearly $10. At some point in the near future I posit the QE and stimulus programs put forth by central banks across the globe will kick in sparking economic growth and a risk on rally favoring Alcoa.

Xerox Corp. (XRX)

The company is trading 28% below its 52-week high and has 20% upside potential based on the consensus mean target price of $7.50 for the company. Xerox was trading Friday for $6.23, down nearly 1% for the day.

Fundamentally, Xerox is solid. The company has a forward P/E of 5.61. The company is trading for 63% of book value and has a PEG ratio of 1.73. Xerox sells for 6.06 times free cash flow. Xerox's EPS growth rate was over 100% this year, yet next year looks gloomy at a mere 8%. The company pays a dividend with a yield of 2.73%. Xerox insider ownership has increased by 58.96% over the past six months.

Technically, the stock is in a down trend. With the recent earnings reported a miss and lowered guidance, the stock gapped lower in late October and is now trading at the lows for the year.

Xerox is trying to transform itself from a printer sales company to a service company where the margins are much higher. The problem is the services business competition is intense. Nonetheless, Xerox has a shot due to its extensive list of contacts created by its established relationships with key clients.

As I stated in a previous article, the October earnings report would provide a better buying opportunity. Xerox cut its guidance expecting fourth quarter EPS of $0.28-$0.30 vs. consensus of $0.32. Fiscal year 2013 EPS of $1.09-$1.15 is expected with flat to two percent revenue growth. On the positive side, the dividend was raised by 35% to an annual rate of $0.23 and the stock repurchase plan was increased by $1 billion. I would wait for some type of trend reversal prior to starting a position even at these levels. Year-end tax loss selling could drive the stock even lower. Even so, I believe Xerox has the wherewithal to pull off the turnaround. The risk reward is favorable for long trades at this level.

SandRidge Energy, Inc. (NYSE:SD)

The company is trading 41% below its 52-week high and has 78% upside based on the consensus mean target price of $8.30 for the company. SandRidge was trading Friday for $5.34, up slightly for the day.

Fundamentally, SandRidge has a few positives. SandRidge is trading for slightly less than book value. SandRidge has a net profit margin of 8.57%. Quarter-over-quarter sales are up 46%.

Technically, the stock had been in a well-defined uptrend until late October. The stock broke above the 200-day SMA, but has since taken a nosedive breaking through all support levels as major stockholders call for a major management shakeup.

Shares have been volatile since TPG-Axon criticized the company last week. TPG-Axon puts forth the dramatic decline in the stock, and massive discount to Net Asset Value, has been caused by three factors:

  • Management strategy has been incoherent, unpredictable, and volatile, amplifying uncertainty regarding the future course of the company.
  • Poor strategic planning and reckless spending have resulted in repeated "financial emergencies" and caused massive dilution, soaring cost of capital, and unnecessary risks for shareholders.
  • Corporate governance has been appalling, which has drained massive value from shareholders and completely misaligned management and shareholder interests.

A second SandRidge investor has stepped up and called for the company to supplant CEO Tom Ward and overhaul its board. Mount Kellett Capital, owners of roughly 4.5% of shares, stated SandRidge "has great assets and should be a great company, but it is clear that it will not be without changes at the top." I see the current sell off as a buying opportunity. The issues will be resolved and the company will snap back with time.

The Bottom Line

I believe the Fed's QE program and other stimulus procedures along with those of other central banks around the globe will begin to spark economic growth and the markets will continue an upward trend. Moreover, the U.S. politicians will resolve the so called "Fiscal Cliff" and the market will rally accordingly.

Searching for buying opportunities in the market takes time. Certain stocks are down for unjust causes and sometimes 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 irrationally?

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 have no positions in any stocks mentioned, but may initiate a long position in AA, BAC, MU, XRX over the next 72 hours. 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.

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