The stocks discussed in this article are basically on sale for half price right now. Many stocks are beaten down currently in the S&P with the correlation in stocks being at the highest levels in years. But these are the 7 most underperforming stocks in the S&P year to date with a two billion market cap or better. Everyone loves a sale but when things are on sale sometimes there is a good reason and other times it’s because someone is moving and they have to give their belongings away at bargain basement prices such as a yard sale. I submit that some of the following stocks fall into the latter category, but as you know one person’s trash is another person’s treasure; so please use this list as a starting point for your own due diligence. Everyone’s risk tolerance is different and there is definitely risk involved in buying stocks in a volatile market at their lows.
Trying to ignore the macroeconomic noise and negative headlines is hard. Buying low is not an easy thing to do, I know, but if you have a long-term time horizon, you will most assuredly make money picking up distressed shares in solid companies at this very time. Markets don’t stay down or up for long, or Wall Street wouldn’t make any money. The Wall Street traders thrive on volatility. Markets fluctuate on a continuum, and we are bouncing along the bottom of it right now -- ergo, it’s time to load up. The very bottom of the market, during March 2009, was the time to buy, but no one I knew was buying; everyone was running for the exits at the exact time they should have been piling in.
Warren Buffett invested $5 billion in Bank of America (BAC) recently. Bank of America announced the investment, declaring it would sell Buffett cumulative perpetual preferred stock, which pays an annual dividend of 6%, and give him a warrant to buy 700 million shares at roughly $7.14 each. Regardless of massive market losses year to date, Buffett says Bank of America is still a “strong, well-led company,” and he is “impressed with the profit-generating abilities of the franchise.”
Nevertheless, Buffett took a lot of heat for making this bold play. Most investors are steering exceedingly clear of financials now, especially Bank of America. I have a certain affinity for Buffett, the “Oracle of Omaha,” as I was born in the great "Gateway to the West" city myself. Furthermore, I am an experienced investor. I have been through several boom and bust cycles and learned that Buffett’s proverbs are words to live by, and following his footsteps (whenever possible) will make you money.
Many analysts are predicting a recession going forward. I don’t see it happening. How soon we forget: Just a few months ago you heard the odds of a double-dip recession were minimal, and now it is virtually assured, according to the crowd. In my experience, the crowd is usually wrong. There may be more volatility in front of us, even with the more than 10% drop in the market recently and the inevitable restructuring of Greek sovereign debt; nevertheless, this may be a good point to start a position in these buying opportunities. I suggest you buy a basket of stocks and start with a quarter or a tenth of a position at a time. I believe we are nearing the end of the correction, and it’s time to start nibbling at the amazing buying opportunities created. Many stocks look really cheap and may rebound simply due to the mean reversion theory.
The mean reversion strategy is based on the mathematical premise that all prices will eventually move back towards the mean, or average, return. Thus, if a stock is underperforming, its price will move towards its average value when the market rebounds. Many of these stocks have been taken down in sympathy with the global market sell-off or due to headline risk. Stock market correlation is at an all-time high, but when the market recovers, I expect these stocks to experience a significant rebound.
With the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation, driving investors into stocks in search for yield. The Federal Reserve guaranteed super-low interest rates for two more years, an unprecedented step to arrest the alarming decline of the stock market and the economy. Bernanke went on to say he expects growth to pick up in the second half of the year. Furthermore, the ECB seems to be stepping up and putting together a “TARP” like plan of action that may finally put an end to the contagion fears of the European countries. This bodes well for stocks, creating a virtual win/win scenario for equities.
It is hard to think beyond the current state of affairs when negative preoccupations always seem to repeat themselves and you are stuck in a revolving door of misery, but the carousel ride inevitably ends, the storm clouds clear and then you feel the first ray of hope shine down. The problem is it’s already too late to buy due to the fact all the savvy investors bought in and ran up the price while you were hiding in your storm cellar. Fortune favors the bold; hopefully you have power dry and take advantage of these amazing buying opportunities.
Moreover, most of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments and positive catalysts for future growth. Below is a table with detailed statistics regarding each company’s current summary and performance information, followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity, followed by a chart of the company's key statistics. Nonetheless, this is only the first step in finding winners for your portfolio. Please use this as a starting point for your own due diligence.
The seven S&P 500 stocks are: American International Group, Inc. (AIG), Bank of America Corporation (BAC), Juniper Networks, Inc. (JNPR), Morgan Stanley (MS), Hewlett-Packard Company (HPQ), Citigroup, Inc. (C) and Freeport-McMoRan Copper & Gold Inc. (FCX).
Current Performance Statistics
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American International Group, Inc., through its subsidiaries, provides insurance and related services in the United States and internationally. The company is trading below analyst estimates. AIG has a median price target of $29 by 11 brokers and a high target of $38. The last up/downgrade activity was on Jun 9, 2011, when Deutsche Bank initiated coverage on the company with a Buy rating.
Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally. The company is trading significantly below analyst estimates. Bank of America has a median price target of $10 by 25 brokers and a high target of $16. The last up/downgrade activity was on May 4, 2011, when UBS initiated coverage on the company with a Neutral rating.
Juniper designs, develops and sells products and services that provide network infrastructure used for the deployment of services and applications over a single Internet Protocol (IP) based network worldwide. The company is trading significantly below analysts' estimates. Juniper has a median price target of $30 by 31 brokers and a high target of $50. The last up/downgrade activity was on Jul 27, 2011, when Oppenheimer downgraded the company from Outperform to Perform.
Morgan Stanley, a financial holding company, provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. The company is trading significantly below analysts' estimates. Morgan Stanley has a median price target of $26 by 25 brokers and a high target of $35. The last up/downgrade activity was on Jun 14, 2011, when RBC Capital Markets initiated coverage on the company with an Underperform rating.
Hewlett-Packard Company offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses, as well as to the government, health, and education sectors worldwide. The company is trading significantly below analyst estimates. Hewlett has a median price target of $30 by 21 brokers and a high target of $54. The last up/downgrade activity was on Aug 19, 2011, when Robert W. Baird downgraded the company from Outperform to Neutral.
Citigroup, Inc., a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services. The company is trading significantly below analysts' estimates. Citigroup has a median price target of $46 by 21 brokers and a high target of $66. The last up/downgrade activity was on Jun 21, 2011, when Standpoint Research initiated coverage on the company with a Buy rating.
Freeport-McMoRan Copper & Gold Inc. engages in the exploration, mining, and production of mineral resources. The company is trading below analysts' estimates. Freeport-McMoRan has a median price target of $65.00 by 17 brokers and a high target of $79.25. The last up/downgrade activity was on Jan 7, 2011, when Canaccord Genuity upgraded the company from Hold to Buy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC, C, HPQ, AI, MS, JNPR over the next 72 hours.
