4 Oversold Stocks Heading Into Q4 2012 Earnings

Includes: AAPL, CME, GE, MSFT
by: Brian Gilmartin, CFA

Given that 89% of the S&P 500 is trading above their 50-day moving averages, a statistic that might be indicative of the overbought nature of the stock market here in the short-term, we have tried to focus on oversold names within some of our favorite sectors.

These aren't buy recommendations by any means, but given the stocks we mention are either oversold or suffering from benign neglect, we think a bad or negative earnings surprise might not mean much downside to the stock, and thus present a favorable risk-reward to readers.

We'll be out with individual reviews of each company:

General Electric (NYSE:GE)

Talk about benign neglect. GE is expecting $0.43 in earnings per share on $38.7 billion in revenues when they report their calendar 4th quarter this Friday, January 18th. Year-over-year (y/y) growth is expected at 10% and 2%, respectively.

The last quarter where GE put up anything other than low-single-digit revenue growth was Q1 2011, so I think GE is a "return-of-global-growth" play.

This is not the GE that was a mega-outperformer during the 1980s and 1990s. GE can't even rally with the financial services sector, even though GE Capital is still 30% of revenues and 35% of operating profit so GE Capital still matters. GE's business model requires an economy that is leveraging, not de-leveraging.

Forward estimates are still getting reduced. I think the issue remains a lack of meaningful revenue growth.

Still, I think the stock is worth between $25 and $30. It has been completely forgotten about.

Microsoft (NASDAQ:MSFT):

Softee was punished by the lowest year-over-year growth in PC sales since 2001, and the rather slow adoption of Windows 8, which is a "touch" application. While Windows 8 allows for the use of the mouse and the traditional GUI icon, the "touch" system is the future for MSFT's operating system updates, thus as more corporations adopt Win 8, it might require more training time and investment to train users on "touch."

MSFT is the safest of the traditional PC plays here given it's a software company and now has more cash on the balance sheet than it did when it declared the special dividend in late 2003. MSFT has said it didn't think the '03 special dividend was a good use of capital.

The stock is at good technical support around $26.

Given forward earnings, i think the stock is worth at least $31 - $33, but if it trades into the high $30s we'd be a seller.

Chicago Mercantile Exchange (NASDAQ:CME):

Not as oversold as it was just 10 days ago, CME's heyday was 2003 to 2007, when the exchange was the intermediary for the hedge fund entry into the commodity world, and transitioning from open outcry to electronic trading. The acquisition of NYMEX and the energy complex crushed CME's return-on-equity, as have the tepid volumes since the 2008 recession.

CME's largest contract complex is the Treasury pits, so a return of interest rate volatility will help CME's volume drought. (Might the debt ceiling talks benefit CME? It could if they get dicey, and cantankerous.)

ICE's acquisition of the NYSE and NYX throws an interesting twist into the sector. It is clear that the exchanges are the consolidators, given their risk-management expertise.

In a decent market, and once rates start to rise, I think CME is worth at least $60 - $65, and a pullback to $49 - $50 should be bought. CME management has shown good expense discipline in tough markets.


Given the action in AAPL, and the stock trading near $500, the stock is now as oversold, near the 2009 lows. It has been beaten up pretty well the last 4 months.

Removing the $128 billion in cash from the market cap, AAPL is trading at 7(x) 4-quarter trailing cash-flow and 8(x) 4-quarter trailing free-cash-flow.

Analysts are still reducing estimates though. With a $45 current estimate, AAPL is trading at 11(x) forward earnings, for what should be at least 15% - 20% growth.

Technically there is a huge gap at $425 from the Jan '12 earnings report. This $425 price target that is getting bandied about isn't any mystery, since it is the point of the gap. Still i think pessimism is too high for the January 23rd earnings report.

Disclosure: I am long GE, MSFT, CME, AAPL. 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.