These Cheap Stocks Offer Upside As The Economy Rebounds

Includes: BAC, NOK, STS
by: Trade In Mexico

There are a number of signs that indicate the U.S. economy is picking up steam and that could mean a full recovery is eventually likely. Of course, downside risks remain, but unless a worst case scenario plays out with the European debt crisis, or perhaps a major decline in China's real estate market, it seems that a general improvement in the unemployment rate and new strength in the housing market could create major traction in the coming months and start to lift many sectors. Permits for new construction recently hit levels that have not been seen since 2008. Another big positive is that car and truck sales have been strong and that uptrend could also continue. For example, U.S. auto sales jumped 3.7% in February. When a couple of major economic drivers like real estate, auto sales, and more hiring combine at the same time, these forces can boost sectors of the economy which are still lagging. If the real estate market and auto sales continue to build steam, the recovery will probably build momentum and that could take a number of stocks much higher in the next year or two.

If you are going to take on the risk of owning a stock, I think it makes sense to focus on picks that have big potential. Last year I suggested investors buy Genworth (NYSE:GNW) when it was trading for just over $5, as a turnaround play and it has since doubled. I also suggested that investors buy Supervalu (NYSE:SVU) when it was at $2.32, and it now trades for about $5. Of course, not all stock picks will double, but these examples clearly show that it is possible to solidly beat the market averages and find stocks that can double in a relatively short time period. I focused on the stocks below as each one appears significantly undervalued in view of the fact that the worst-case scenarios have not played out in Europe, and that the economy in the U.S. appears positioned for a multi-year recovery. With that in mind, here is a closer look at three high-potential stocks that could be poised to double as the economy improves:

Bank of America (NYSE:BAC) stock was getting very little respect a couple of years ago, but in recent months, investors have become decidedly more bullish. The housing market is showing signs of a turnaround, and a major rally in homebuilding and mortgage insurance stocks is confirming the belief that this sector is finally ready to rebound. There have also been signs that the job market is at least slowly trending in the right direction and that is another positive for the U.S. economy and Bank of America. As one of the largest banks in the world and since it has a massive network of retail banking branches, Bank of America is (in many ways) a proxy for the health of the U.S. economy.

It's not just improved economic news that is increasing investor interest in BofA, it is also the fact that this company is slowly but surely working through legal claims and litigation that resulted from the housing crisis and its acquisition of Countrywide. Bank of America recently settled a lawsuit which accused the company of improper foreclosures practices. It also settled with Fannie Mae, the government-backed mortgage agency. These settlements have reduced earnings in recent quarters, however, resolution adds clarity and it prompts investors to look forward to "normalized" earnings. This term represents what BofA might be able to earn under normal conditions which include diminished litigation and settlement expenses and a stable economy. For the fourth quarter of 2012, BofA earned $367 million or about 3 cents per share, however, these results were impacted by settlement charges.

While BofA has made plenty of progress, challenges remain. There are still major risks facing the global economy that could come from the European debt and banking crisis, or from a potential real estate bubble bursting in China. If a major crisis occurs, it could be enough to derail the housing recovery and that would diminish the outlook for BofA. Furthermore, there is political and legislative risk from Washington D.C. as many politicians on both sides feel that large banks should be taxed and regulated more heavily or even pared-down so "too big to fail" risks are minimized. Some politicians support reinstating the "Glass-Steagall Act" which separated commercial and investment banking and that could lower profits. Headline risks from these types of proposals along with ongoing concerns about Europe and China should be considered, especially in light of the recent rally in BofA shares. However, short-term pullbacks should be considered as buying opportunities for the long-term as the stock appears to have significant upside.

Meredith Whitney recently said that BofA is undervalued and she predicted that in the next two years, the shares would go "into the $20's." That could give investors who buy on dips a gain of roughly double. Meredith Whitney was impressed with the recent stress test results and the cost-cutting measures at BofA. After the stress test results were reported, BofA announced plans to buy back about $5 billion worth of stock. That could contribute to earnings per share growth in the future. The positive stress test results also means the company could be one step closer to raising the paltry dividend of 4 cents per share. A major dividend boost could act as another catalyst for the stock. For all these reasons, it appears that BofA shares are poised to continue trending higher, and there is a solid case for the stock to even double in the coming years. However, since plenty of headline risks remain for banks, it makes sense to wait for a pullback.

Key Data Points For Bank of America From Yahoo Finance:
Current Share Price: $12.42
52-Week Range: $6.72 to $12.94
Dividend: 4 cents per share which yields .3%
2013 Earnings Estimate: $1 per share
2014 Earnings Estimate: $1.31 per share
P/E Ratio: about 12 times earnings

Supreme Industries, Inc. (NYSEMKT:STS) manufactures truck bodies, buses, armored and specialty vehicles. It makes cargo vans, "Kold King" insulated vans for refrigerated goods, specialty vehicles that are used in landscaping, construction and other service industries, "StarTrans" shuttle buses which are used by hotels, nursing homes and airports. It also makes trolleys which are frequently used by resorts and theme parks.

Many of the various industries that buy these vehicles are showing signs of improvement and that means revenues and profits could be poised for growth. For example, the housing industry is coming back strong and that should boost demand for vehicle sales to the landscaping and construction industry. The travel industry is doing well and that means shuttle buses and trolleys are increasingly needed. Ford (NYSE:F) and General Motors (NYSE:GM) are also reporting strong car and truck sales to both consumers and businesses and that is another positive indicator for vehicle sales in general.

This stock appears very undervalued when considering the current price to earnings multiple, which is around 4.5 times earnings. That is below the average for the industry it operates in and for the stock market in general. This stock used to trade for about 10 times earnings, and between $8 to $9 per share before the recession, and based on earnings estimates of 82 cents per share for 2013, a more reasonable price to earnings ratio of 10 would put this stock at about $8, or nearly double the current price.

Because the economy is showing signs of improvement, and because the world is awash in cash that earns next to nothing, there is a rising level of merger and acquisition activity. In fact, 2013 is starting out with a wave of buyouts from big corporations to private equity firms. There are a number of companies that could be suitors for Supreme Industries and that ranges from firms in this sector to private equity companies. When you consider that this company has around $286 million in annual revenues, and that the current market capitalization is just about $65 million, it is easy to see why the stock has room to move much higher and why a private equity company or other firm might want to buy it.

Supreme looks very undervalued when using price to earnings ratios, and it also trades below book value which is $4.41 per share. Data on the market capitalization, annual revenues and book value can be seen here. Supreme Industries stock also looks cheap when compared to other companies. Let's look at some other companies in this sector, which support the case for why Supreme could be an attractive buyout target and why the shares could be worth double:

Commercial Vehicle Group, Inc. (NASDAQ:CVGI) makes a variety of parts and components for commercial vehicles. This stock trades for about $8 per share and analysts expect it to earn just 45 cents in 2013 and about $1 per share in 2014. That puts the price to earnings ratio at about 20 times for 2013 and around 8 for 2014.

Wabash National Corp. (NYSE:WNC) manufactures customized truck trailers, refrigerated trailers, steel and aluminum flatbeds, and other related products. Analysts expect this company to earn 88 cents per share in 2013. That is about the same as the estimates for Supreme but this stock trades for nearly $11 per share and that makes another case for upside in Supreme shares. It's also worth noting that Wabash shares were trading at about $6 in November and have come close to doubling in just the past few months. That is another indicator of increased investor interest in this sector and it shows how fast some stocks can nearly double.

Spartan Motors, Inc. (NASDAQ:SPAR) manufactures specialized motor vehicle products and bodies for emergency response vehicles, motor homes, delivery and other vehicles. Analysts expect Spartan to earn 23 cents per share in 2013 and 43 cents in 2014. That is much less than estimates of 82 cents for Supreme, and Spartan shares trade for about $5.60. Again, this makes another strong case for buying Supreme shares which appear dirt-cheap next to this stock.

Supreme has a solid balance sheet, a bargain level valuation, and a product line that is poised to benefit from an economic recovery. That could make it a perfect candidate for big gains in the coming weeks and months, and even a potential takeover target from a competitor or private equity firm. The companies noted above could find a takeover of Supreme Industries to be accretive to earnings and very attractive since those stocks trade at a higher price to earnings multiple. Since this company is reporting profits and because it has a strong balance sheet with minimal debt, the main downside risk appears to be if the U.S. economy has another recession, but that does not seem likely anytime soon. The limited downside risk bolsters the suitability as a buyout target.

A couple of other factors appear to be indicating that this stock could break out to the upside. Multiple insiders have recently been making repeated buys of this stock. That could be a sign that they are seeing higher revenues, profits and upside for the stock. Supreme shares have been trending up in a series of higher highs and higher lows. That is a bullish pattern, plus, technically the stock just put in a "golden cross" formation because the 50-day moving average has just crossed over the 200-day moving average. Because of all these factors and a cheap valuation, it appears poised to take out the 52-week high of $4.66 per share in the short term. However, investors might be rewarded with a double if the market starts to recognize how undervalued this stock is at current levels.

Key Data Points For Supreme Industries From Yahoo Finance:
Current Share Price: $4.40
52-Week Range: $3.01 to $4.66
Dividend: none
2013 Earnings Estimate: 82 cents per share
2014 Earnings Estimate: 86 cents per share
P/E Ratio: about 4.4 times earnings

Alcatel-Lucent (ALU) shares were trading around $1.40 in early January but then surged to about $1.80 in February. More recently, this stock has experienced a pullback to the $1.30 level which could be creating a buying opportunity. This low-priced stock once traded at much higher levels, but Alcatel-Lucent faces a number of challenges which has put a lot of pressure on the stock in recent years. However, a recovery in the U.S. and eventually a turnaround in Europe could lead to much stronger IT spending levels, which will benefit companies like this one.

This company is the product of a 2006 merger between Alcatel of Paris, France and Lucent Technologies which was based in the United States. The merger created a global leader in broadband networking, IP technologies, applications and services. While the company is headquartered in Paris, it has operations in many parts of the world and in particular, the United States where a major portion of its research and development and revenues are derived.

This company has taken measures to improve profitability and it recently appointed Michel Combes as CEO. The company also announced plans to reduce its workforce by about 7% which could lead to significant cost savings. This seems similar to a turnaround/restructuring plan announced by Cisco Systems (NASDAQ:CSCO) a couple of years ago by CEO John Chambers, which subsequently resulted in better financial results and a rising stock price. It seems that Alcatel-Lucent is wise to follow Cisco into job cuts and expense reductions, especially as it might still have more staff than needed as a result of the merger a few years ago.

Alcatel-Lucent has a solid financial position with about $6.4 billion in cash and around $6.2 billion in debt. It also holds quite a number of valuable patents and it still generates a major amount of revenues. These factors could make the company an attractive takeover target. Cisco Systems or a private equity company could be suitors, according to some industry watchers. In recent months, private equity companies have made bids for Dell (DELL) and many other companies. While downside risks remain, especially because this company has significant exposure to the still depressed European economies, the takeover and turnaround potential seems difficult to ignore, especially when this stock has experienced a pullback. It's worth noting that if the European economy improves in the next few years, it could become a real positive rather than a headwind.

A couple of factors would probably need to come together for this stock to double and this includes successful implementation of cost-cutting measures that the company has already announced, growth in revenues from a rebound in the U.S. economy and a major improvement in the European economy. It also needs to make inroads into emerging market countries as it has recently done with deals in Iraq and India. All of these catalysts could occur in the next couple of years and that could take the stock much higher. This company has produced inconsistent earnings in recent years, however, as recently as 2011, it posted earnings per share of 36 cents, and the cost cuts and top-line growth catalysts discussed above could allow it to reach that level of earnings once again. A multiple of about 8 times on 36 cents per share would justify a stock price of about $3, which is just about double the current price. However, this company has been reporting losses in recent quarters and that makes this a higher risk stock.

Key Data Points For Alcatel-Lucent From Yahoo Finance:
Current Share Price: $1.32
52-Week Range: 91 cents to $2.45
Dividend: none
2013 Earnings Estimate: a loss of 13 cents per share
2014 Earnings Estimate: a profit of 1 cent per share
P/E Ratio: n/a

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Please consult a financial advisor before making investments.

Disclosure: I am long BAC, STS. 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: I may buy ALU shares soon as well.