We looked for undervalued stocks trading under $7. All the stocks on this list have valuable assets but have been beaten down for a variety of reasons. The list includes a few industry giants going through rough patches, and also some smaller firms that could be on the rise. Here is the breakdown:
GMX Resources (GMXR) is an oil and natural gas production company based out of East Texas. GMX concentrates most of its drilling in the Haynesville Shale but recently added oil exploration in the Bakken formation in North Dakota and the Niobrara formation in Wyoming to diversify its holdings. Natural gas prices hit GMX hard at the end of 2010, causing a reported net loss of $149 million. Stocks fell as low as $4.20 on February 15 of this year, but share prices have recovered a bit, hitting $5.69 yesterday. Weaker performance than expected in late March saw many analysts downgrade the stock, but we expect GMX to improve once gas prices recover. For our full valuation of GMX, click here.
Full House Resorts (FLL), which owns and operates resorts and casinos around the U.S., has a market cap of $64.49M. Although small, the company is one of the financial stalwarts of the industry. With no long-term debt and a current ratio over 11, the firm had at an outstanding 56% operating margin in 2010. ROE was above 17%. Despite the strong fundamentals, FLL is trading at a low valuation compared to its peers. Its P/E of 8.86 and price/cash flows of 3.8 are both near the bottom of the industry. Additionally, the company has grown rapidly the last few years – 2010 EPS grew 65% year over year, after 225% growth in 2009.
This growth has continued in the last few months, as the firm was approved for an Indiana gaming license. This allows it to complete its acquisition of the Grand Victoria Casino. If the economy continues its recovery, Full House should be in a prime position to come out as a winner.
Sprint (S): With a market cap of $15.59B, Sprint has had negative earnings the last few of years. Nonetheless, cash flow has remained positive, with $1.61 of cash flow per share in 2010. Trading at a dirt-cheap price/sales of $0.5, Sprint added 1.7 million net subscribers in 2010. We think the market is too focused on Sprint’s recent issues. The firm has valuable assets and a solid subscriber base, and is on an upward trend in terms of customers. If it can improve efficiency, the stock price should see a sharp rise.
However, the big news right now is the pending AT&T (T) acquisition of T-Mobile (OTCQX:DTEGY). Sprint had supposedly been in merger talks with T-Mobile, and many people see them losing out from the announced deal. However, merging with T-Mobile would have added a fourth different technology to Sprint’s network, reducing the possible benefits.
Furthermore, the pending merger should remove one of Sprint’s main competitors for the lower end of the market, leaving it as the main alternative to AT&T and Verizon (VZ), the two big carriers. Additionally, this deal could be the first of several in the wireless industry. It would not be surprising to see Sprint involved in a deal of its own, whether as a buyer or seller, possibly even selling to Verizon. Shares trade at $5.34 at the time of writing.
Denny’s (DENN), the family restaurant chain, has a market cap of $379M, and is trading at a P/E of 18.29. Although recent years have been tough, earnings growth is expected to be strong. With a PEG of only 0.56, Denny’s is trading at a tiny valuation relative to it expected growth. Although its current ratio appears low, it is currently at one of the highest points in the last 10 years, showing improved financial conditions. Institutional investors have also increased purchases of the stock recently, a sign that investor sentiment is rising on the stock. As business picks up and people eat out more, Denny’s should see strong growth.
SciClone Pharmaceuticals (SCLN) is a biopharmaceutical company with a market cap of $307M that focuses on treatments for cancer, hepatitis and other fatal diseases. This American firm primarily markets drugs in China, with a presence in other regions such as Latin America as well. The company’s main drug, Zadaxin, is approved for treatment of hepatitis B in over 30 countries. It has also completed phase 2 of approval for Liver Cancer in the U.S. and Melanoma in Europe, and has completed phase 3 for hepatitis C in Europe. Two more SciClone products are entering the commercialization stage in China, with more products still in the approval process in countries around the world.
Demonstrating China’s growth potential, SciClone’s EPS jumped 72% in 2010, and are expected to grow significantly by 2013. With almost no debt and a current ratio over 7, SCLN’s operating margin in 2010 was 26.31%, also near the top the industry. Further proving the point, the firm had $21 million in free cash flow in 2010, and had a ROE of 30.21%. Assuming China’s pharmaceutical market grows anywhere near analyst estimates, SciClone’s strong performance should pay off for investors.
Chimera Investment (CIM) is currently yielding 15%. The company grew profits by 64.47% to $533 million in FY 2010 through October, after posting a return to positive territory in FY 2009 by drawing in $324 million in profits from -$120 million in FY 2008. For Q1 2011, the company made $156.22 million in profits. In comparison, Q1 2010 resulted in $95.46 million in profits.
Trading in the high 3s, it beat earnings estimates in many of the past quaters. This play is not for capital appreciation, but it is for the dividend payments. The company invests in US government and private residential mortgage-backed securities representing interests in obligations backed by pools of mortgage loans.
Sappi (SPP) grew revenues by 22.41% to $6.57 billion in FY 2010 through September, after declining by 8.43% in FY 2009, but rising by 10.54% in FY 2008 and +7.35% in FY 2007. Net income was positive with $66 million in FY 2010, but negative in FY 2009 with -$177 million. EBT margins are also thin. However, shares trade with a price to sales multiple of 0.4. In 2006 and 2007, those figures were 0.8 and 0.6, respectively. In addition, the company aims to reduce finance and debt costs with a tender offer to repurchase up to $150 million of senior notes, which mature in June 2012.
Advanced Semiconductor Engineering (ASX) grew revenues by 120% to 188.7 billion TWD ($6.37 billion) in 2010, after falling 6.8% in 2009. EPS shot up by 171.9% to $0.484. Some optimism surrounds the company, as 2 analysts expect the company to grow EPS to $0.57 or to $0.69.
EBT margins were also healthy in 2010 with 12.1% and in 2009 with 9.7%. Shares also trade with a P/S multiple of 1.2. From 2005 to 2007, those multiples were 1.5, 1.7, and 1.7, respectively. Moreover, the company has a healthy debt to equity ratio of 0.48, and current ratio of 1.44. Because the company is the world’s largest semiconductor packaging and test company, we expect significant capital appreciation once the global economic environment stabilizes and is on a strong growth path.
Popular (BPOP) is a bank holding company that operates in Puerto Rico and the U.S. as Banco Popular. It also delivers financial services across 96 branches in New York, New Jersey, Illinois, Florida and California. The bank’s deposits are insured by the FDIC, and it has $38 billion in assets. The company drew in $2.58 billion in revenues in 2010, which was an increase of 29.3%, after declining by 5.28%. Profits were also positive with $137 million, after posting - $574 million in 2009. The EBT margin was a healthy 9.51%. EPS came in at -$0.06 in 2010, but it was $0.24 in 2009. Analysts predict 2011 to bring in good EPS results with a range from $0.14 to $0.30. P/S is currently 1.0, but during good times it was between 2 and 3.
Disclosure: I am long GMXR.
Additional disclosure: Long GMXR, Short GMXR puts and calls