5 Turnaround Plays On The Upswing With Significant Upside

Includes: AA, BAC, BTU, DWDP, F, FCX
by: David Alton Clark

Times of high market volatility often present the best buying opportunities for savvy investors. Contrarian investors often find their best investment opportunities during these times. One of Warren Buffett's famous quotes is: "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market volatility creates opportunities to buy stock in solid companies with sound prospects, hopefully you have powder dry and take advantage.

Eurozone sovereign debt and political concerns are again at the forefront of investors' minds. The market is currently focused on the French elections and Spanish bond yields rather than company fundamentals. This is demonstrated by the sell-off of Alcoa after reporting a great quarter and giving positive guidance. To open a position you must have courage in your convictions. The following are stocks I see as bottoming now and trending up throughout the rest of 2012. All have reported 2012 Q1 results that beat Wall Street expectations with the exception of Ford (NYSE:F) that reports on April 27th. Please review the following summary table follow by a brief review of each company detailing why I see this stocks moving higher in the near future.

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Alcoa, Inc. (NYSE:AA)

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Alcoa just pulled out one of the biggest earnings surprises in quite some time. The company reported a net income for the first quarter of $0.09 per share versus an expected loss. The company is slashing output capacity by 390,000 tons, having lowered refining capacity by 531,000 tons in January. Additionally, Alcoa is undergoing a cost restructuring to reduce aluminum costs by 10% by 2015. Alcoa has total global refining capacity of 18 million tons per year. The company projects Aluminum prices to rise by 7% in 2012.

Alcoa recently increased prices on several of its products. Alcoa increased prices for certain aerospace plate products by 5 percent, due to higher materials costs and increased demand. Alcoa said the price hike takes effect immediately for 2xxx and 7xxx heat treated plate produced by its Global Aerospace, Ground Transportation and Industrial & Specialty Products Group. Additionally, Alcoa has raised prices for some rolled products at its European operations in Köfém, Hungary; Fusina, Italy; and Amorebieta, Spain, citing higher materials costs and increased demand. The price increase takes effect immediately and is related to changing market conditions, due to extended lead times and increasing costs that have pressured the rolled products business in recent months.

Alcoa is down 6% for the month and 40% off its 52 week high. The stock has been trading sideways for the past six months. I believe a solid bottom has been established and the stock is poised to move higher. The stock has several fundamental positives. With a forward PE of 10 and trading at three fourths book value, I see significant value. EPS next year are expected to grow by 71%. In March Stifel Nicolaus reiterated its Buy rating on the stock and raised their price target to $13. The stock looks undervalued at this level.

Bank of America Corporation (NYSE:BAC)

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Bank of America has been one of my favorite stocks for most of this year. It was one of my picks to double in 2012. The problem for the stock recently is it actually achieved that double by the end of the first quarter. Since hitting a high of $10, the stock is down 15% for the month and 32% off its 52 week high. Strangely, the recent sell off came just as the company beat earnings and saw six analysts raise their target prices on the stock following its earnings announcement. Three analysts raised their target prices to $10, while leaving neutral/market perform recommendations on the stock.

A headwind for Bank of America is the Dodd-Frank Wall Street Reform and Consumer Protection Act which halved the fees banks can charge retailers each time a customer swipes a debit card. Additionally, other federal regulations changed the ways banks are allowed to charge overdraft fees on checking accounts, costing them more money.

Nevertheless, I believe this scenario is more than baked in to the stock. The company is trading at .38 of book value with a forward PE of 7.89. If you have a long-term time horizon, this is an excellent buying opportunity. The recent pullback in the stock is a healthy correction after seeing such a rapid run up in the company's share price.

Peabody Energy Corp. (NYSE:BTU)

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Peabody is down significantly due to regulatory issues and cheap natural gas being used as an alternative electric power generation fuel. Peabody was one of my picks to double in 2012. Unfortunately, that prediction has not turned out so well. The stock is down 10% for the year, 5% this month and still 54% off its 52 week high.

Nevertheless, Peabody's earnings beat the street's expectations. The beat was fueled in part by production gains in Australia - spills over to help lift up other select names in the beat-up sector along with word that U.S. coal exports to China may double in 2012. Q1 EPS of $0.67 beat estimates by $0.13 while revenues of $2.04B were up 17% year over year and in-line with expectations. In response to a question regarding increasing demand on the conference call, Gregory H. Boyce, Peabody's Chairman and CEO stated,

I think the main driver right now we're seeing is demand pick up, the early signs of increasing demand pick-up through the back end of the year. China's steel production for the first part of April is just running at a torrid pace. As we know China imports were up 80% year-to-date that was a combination of both thermal and met coal.

Howard Weil upgraded the stock after the earnings report to Market Outperform and gave it a $51 dollar price target. That is a 70% premium to the current share price. As I've stated many times, I don't see China slowing down anytime soon. This bodes well for Peabody. Maybe I wasn't wrong on my call for a double, just early. I'm in the bullish camp at this time. Peabody appears fundamentally undervalued currently with a forward PE of 7.53, a price to book value ratio of 1.47 and an EPS growth rate of 41.94% for next year. I like the stock here.

Ford Motor Co.

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I am a fan of Ford's products and management team. The fact that they did not take any bailout funds was a big positive for me. Nonetheless, Ford has been a disappointment to me this year. Last quarter they missed estimates and dropped five percent the day after earnings. They are due to report next Friday the 27th. I see several positives coming to fruition for the stock this year. First, Ford recently announced a joint venture with a subsidiary of Dow Chemical (DOW), Dow Automotive Systems, to develop methods of using carbon fiber in vehicles to reduce the weight by 250-750 pounds. Secondly, Ford recently unveiled plans to expand in China saying it will invest $760M to build a new plant in the eastern Zhejiang province. The news comes on the heels of a recent announcement Ford will spend $600M to build a third factory at its Chongqing complex in southwest China. Also, the Ford Focus was named Russia's 2012 Car of the Year for its class.

I am bullish on the stock prior to the upcoming earning announcement. Ford raised its 2012 sales forecast from 14.5 to 15 million units recently. First quarter U.S. sales were the highest in the past four years. March sales for the F-Series were the strongest in five years. The stock is down 10% for the month and 30% off its 52 week high. I have traded in and out of Ford for the past four years and like the way this earnings report is setting up. When the stock is up prior to earnings it usually is a sell the news event. I am looking to get into the name on Monday. Ford has a PEG ratio of .46, a forward PE of 6.63 and an EPS growth rate of 17.01%. The stock has pulled back to its 200 day sma and the bottom of its upward trend channel. The company has a 15% profit margin and a dividend yield of 1.75%. Standpoint Research upgraded the company in March from a Hold to a Buy with a $17 price target.

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

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Freeport is another one of my perennial favorites. Freeport is trading at 3.3 times EBITDA, cheaper than any other base metals producer with greater than $10B market cap. According to a recent Bloomberg report, the company is an acquisition target. The company sells for approximately half the average price of similarly-sized firms focused on copper mining.

The company recently exceeded the consensus estimates of 86 cents regarding 2012 first quarter results. The company posted an adjusted net income of 96 cents per share. Although earnings were down year over year due to a three-month strike at the company's large Grasberg mine in Indonesia coupled with lower copper prices and higher production costs. Nevertheless, a positive earnings surprise and a production increase plan in the works should pave the way for Freeport to top full year consensus estimates. The company discussed plans to considerably increase copper production by ramping up Indonesian operations and expanding of mining and milling operations in the U.S. Standpoint Research upgraded the stock from Hold to Buy in March with a price target of $48.


I have been around long enough to know macro headline risk provides great opportunities to buy sound companies at discount prices. As we all know, in life, timing is everything, and the time is now to buy the following stocks. This could be your last chance to pick up these stocks at this level once investors realize things aren't as bad as they seem. A contrarian is one who attempts to profit by investing in a manner that differs from the consensus, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. I believe these stocks fit the bill.

Nonetheless, this is only the first step in finding winners for your portfolio. Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX, BAC, BTU, F, AA over the next 72 hours.