In recent weeks and months, the housing and automobile market has been showing signs of strength. For example, April car and truck sales in the United States were up by double-digits at many major automakers like Ford (NYSE:F), General Motors (NYSE:GM), Chrysler and others. This was the best April for auto and truck sales in about six years. Recent housing data is also very encouraging with prices rising in many parts of the U.S. and inventories dropping as low interest rates spur strong demand for investors and consumers to buy homes again. Jobs data has also been improving and when you combine that along with the strong housing and auto sales, the economy could be poised to accelerate the speed in which it recovers.
While the market has experienced a significant rally, there are still a number of ways to find stocks that could be poised for significant upside as the economic recovery accelerates. The picks below would all benefit significantly from economic growth and all of these stocks are still trading way below the highs reached before the financial crisis started in 2008. Here are a few cheap stocks to consider buying for what appears to be a long-term rebound in the economy:
Genworth Financial Inc., (NYSE:GNW) is a leading insurance company that provides policies for mortgages, annuities, life insurance and other financial products. As a spin-off from General Electric (NYSE:GE) in 2004, this stock once regularly traded for about $30 per share. However, the aftermath of the 2008 financial and housing crisis took a major toll on companies that provided mortgage insurance. Genworth shares plunged but the company has survived and it was able to offset some of the losses in mortgage insurance with profits from other lines of business that remained profitable.
At this point, there seems to be much less risk for Genworth shareholders because the housing data has started to shows signs of a real turnaround. This has ignited a major rebound in many mortgage insurance stocks in the past couple of months, including Genworth. This stock has jumped from about $5.25 per share when I suggested it should be bought late last year, and it now trades for around $10 today. Even after a big gain, this stock appears undervalued and it could have a lot more room to run if you have a longer-term horizon.
Genworth has a new CEO as Michael Fraizer resigned, allowing Thomas McInerney to become the top executive. The new leadership should please some investors, many of whom were disappointed last year when the company announced it would cancel the planned IPO of its Australian mortgage insurance unit. The company appears to be moving forward now and well-positioned to take advantage of the rebound in real estate. It's possible that Genworth will be able to have "normalized" earnings in the next couple of years. This term refers to what the company might be able to earn when business conditions return to normal and profits are not overly weighed down by mortgage insurance losses.
This stock trades well below book value, which is $33.61 per share. It also appears undervalued when considering the price-to-earnings ratio. Analysts expect Genworth to earn $1.14 in 2013 and $1.38 for 2014. That puts the price-to-earnings ratio at roughly 8 times earnings which is about half the average PE ratio of 16 times for the S&P 500 Index (NYSEARCA:SPY). Not long ago, Barron's made a strong case for why Genworth shares could rise to $18, or maybe even higher. That would give investors who buy now, a gain of roughly 100%.
Radian Group, Inc., (NYSE:RDN) shares were viewed as toxic by some investors and shorts piled in not too long ago, but things sure have changed in the past few months. In August 2012, this stock was trading at around $3 and some investors even doubted the viability of this company, but the stock has since nearly quadrupled and the only way this stock has been toxic is if you shorted it.
Radian is one of the largest mortgage insurance companies and that was a real problem when the housing crisis appeared to be never-ending. Now that real estate is showing signs of recovery for the past several months, being in the mortgage insurance business is suddenly very positive. In recent days, this stock has moved a little too far and too fast for my tastes and the company is still expected to post losses of 22 cents per share for 2013. However, analysts estimates are at $1.03 per share in earnings for 2014. In the short-term, this stock appears to be getting way ahead of itself, so I would wait to buy on dips. However, in the long term the stock could be cheap even at current levels and a couple of high-profile investors have become very bullish on Radian.
John Paulsen who famously made billions for himself and his investors during the financial and housing crisis recently said that Radian shares could be worth $20, by 2015. However, it is worth noting that some of Paulsen's recent bets on gold and gold mining stocks have not been doing well. CNBC's Jim Cramer has also become very bullish on Radian shares and has even used the word "cheap" to describe the shares. Cramer could be right that this stock is cheap when considering future earnings. He also says that Radian has "tremendous earnings momentum" and that "Radian is perhaps the best in this business."
Radian raised capital in early 2013, which strengthened its balance sheet. This reduces risks for investors however, since it is still expected to post losses in 2013, this is a downside risk to consider. I think investors should consider waiting for a short-term pullback before considering this stock. However, the housing market recovery is putting Radian back on course in the long run and investors who buy on dips could end up with very strong gains if this stock hits Paulsen's $20 price target in 2015.
Metalico, Inc. (NYSEMKT:MEA) processes and recycles a wide range of industrial metals like lead, aluminum, molybdenum, tungsten and tantalum at its recycling facilities located in Alabama, California and Illinois. Metalico also processes more valuable metals which include platinum, palladium, and rhodium, which are primarily obtained from vehicle catalytic converters and electronics.
A slower economy in many parts of the world such as Europe, and even a slowdown in China has reduced global demand and pricing for steel and other metals. This has created a challenging environment for many steel and other metal companies in the past year or so. However, there are signs that Metalico's financial results and share price have already bottomed out and it could be poised for a significant move to the upside as the demand for industrial metals improves in a U.S. led economic rebound.
Metalico shares are trading at $1.65, which is a mere fraction of the book value of $3.77 and for about half of the 52-week high which is $3.18. Furthermore, this stock has historically traded for $5 per share and even more when industry conditions allowed for higher metal prices, which are likely to occur as the economy continues to improve. For example, the average age for a used vehicle on the road today is well above historical norms and that means Metalico could benefit from increases in catalytic converter recycling as old cars are scrapped. Higher demand for steel and aluminum could come from the automakers and the aerospace industry. Recent housing data has been showing major signs of improvement which could boost prices for copper, steel, and aluminum as those metals are frequently used in construction and in appliances. All of these factors point to a bottom for this company and so do recent financial results which have been getting better.
Metalico recently reported much improved financial results. For the first quarter of 2013, Metalico achieved $611,000 in operating income before deducting interests and taxes, which created nearly break-even results on a per share basis. This compares favorably to a $1.7 million operating loss adjusted for impairment charges reported in the fourth quarter of 2012.
Furthermore, the company has moved to control costs and that is starting to pay off already. For example, on a year-over-year basis, operating costs have fallen on a per unit basis and SG&A expenses have declined by about 10% due to a reduction in payroll, benefits and other expenses. The company has also been seeing solid demand for its lead fabrication and that is expected to continue. Also, the recent conference call for the first quarter hints that the company might be about to secure a large contract which could create an upside catalyst for the stock. When asked by an analyst about this matter, Carlos E. Aguero (President and CEO) who has a significant stake of over 5.5 million shares in Metalico, responded by stating:
Yeah, it happened to… Just sort of briefly, it happened to coincide with a previously scheduled meeting that for a large job that is coming up which we feel confident that we are in line to secure. We've been given indication that we will in fact get it, and we're now just waiting for confirmations and permits. But that's really… Because of competitive reasons, I really don't want to go into it any further, but I will say that it was a successful visit and that we expect to get results from it.
While challenges have not fully dissipated, the downside risks seem to be relatively limited since the company has greatly reduced expenses, and since another recession seems unlikely at this time. The increasingly bullish signs for the housing and auto sector also point to the potential for a more broadly-based economic recovery that could lead to higher metals prices and much stronger profit margins for this company in the coming quarters. Also, the major contract that was discussed in the Q1 conference call could also push the stock higher when and if that deal is confirmed and announced. In the past several years this company has been historically able to produce profits of around 50 cents per share and investors who buy now could be poised to reap rewards of a potential multi-bagger. The last time the CEO, Carlos Aguero appears to have sold this stock is on June 5, 2011, and he received $5.61 per share, which is what the stock could be worth as the economy and metal prices recover. (A $5 to $6 per share target seems reasonable based on a price-to-earnings ratio of about 10 to 12 and earnings power of roughly 50 cents per share.)
Bank of America (NYSE:BAC) is one of the largest banks in the world and a leading provider of mortgage loans. The financial and housing crisis caused this stock to drop from about $55 before 2008, to just over $12 today. However, the worst seems to be over for this financial giant and the housing exposure that has dogged it for years, might become a positive in the coming years. Bank of America could be considered as a proxy for the health of the U.S. economy because it has one of the largest retail branch networks, it is also a major lender to consumers and businesses and it owns Merrill Lynch. As housing is showing signs of strength, job growth is also likely to improve which could also lead to increased profits for BofA.
To be sure, Bank of America is still facing downside risks and this includes ongoing litigation and settlement expenses in a number of significant cases. For example, bond insurer MBIA Inc (NYSE:MBI) and BofA recently announced a settlement over mortgage-backed securities packaged by Countrywide Financial Corp., (which was acquired by BofA after the financial crisis hit). Other litigation has also been ongoing although the company has also settled a number of other significant cases, which have impacted earnings in recent quarters.
In spite of the recent settlements and ongoing litigation, it appears that many investors are increasingly looking at what BofA can generate in "normalized" earnings, which would be at some point in the future when the company is no longer heavily weighed down by settlements and litigation. If housing demand and prices continue to increase, this solves many problems for the U.S. economy and for BofA. When business conditions are normal for BofA, this stock could trade closer to book value, which is around $20 per share. A top stock analyst, Meredith Whitney also sees the stock going back to about $20. For all these reasons, BofA shares look like a great way to play the rebound in real estate.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long GNW, MEA, BAC. 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.