5 Diamonds In The Rough Under $5 With Over 40% Upside On Average: 3 Buys, 2 Sells

Includes: AMD, GRPN, NOK, S
by: David Alton Clark

The Gist

The fourth quarter is a seasonally bullish time of the year for technology stocks for two major reasons. First, this is the time of year many tech gadgets are introduced for people to buy as gifts during the upcoming holiday season. Secondly, many tech departments go on a spending spree with their remaining budget dollars.

I have selected five technology companies with recent news to review. I believe three are poised to move higher based on upcoming catalysts while two will most likely drop in value. In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will analyze potential sector, industry and company specific catalysts.

The Goods

The stocks selected for review had shares trading well below their consensus estimates and 52-week highs. The companies were trading on average 61% below their 52-week highs and have 41% upside potential based on analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for buying opportunities.

Additionally, the five stocks have some positive fundamentals and share prices trading at or below $5. Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. Finally, these are stocks with market caps of $2 billion or greater.

In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to stay with the position or sell out. The following table depicts summary statistics and Tuesday's performance for the stocks. The following charts are provided by Finviz.com.

Alcatel-Lucent, S.A. (ALU)

The company is trading 65% below its 52-week high and has 39% upside potential based on the analysts' mean target price of $1.56 for the company. ALU was trading Tuesday for $1.12, down nearly 3% for the day.

Fundamentally, ALU has some positives. EPS growth for this year and next year is expected to be over 200% according to Finviz.com. ALU is trading for approximately 60% of book value and has a PEG ratio of 1.27. On the negative side, the company's sales are down 7% quarter over quarter. The company has a meager net profit margin of just over 1%; an ROE of only 5% and EPS is dropping drastically quarter over quarter.

Technically, ALU may have turned the corner. All the major moving averages are beginning to flatten out. The stock has put together a nice period of consolidation over the last few weeks bouncing off its 52-week low in late July. The risk reward ratio is favorable at this point and the company just settled a legal dispute removing some uncertainty.

Advanced Micro Devices, Inc. (AMD)

The company is trading 60% below its 52-week high, and has 53% upside potential based on a consensus mean target price of $5.02. AMD was trading Tuesday for $3.28, down over 5% for the day and hitting a new 52-week low.

Fundamentally, AMD has some positives. AMD's EPS is expected to grow by 37% next year. AMD trades for 6.83 times free cash flow. The company has a forward P/E of 8.86. Insider ownership is up 84% over the last six months. On the other hand, sales and EPS are down 10% and 40%, respectively, quarter over quarter. ROE is negative 45.61%, and the company sports a -10% net profit margin.

Technically, AMD's chart is the definition of a falling knife. The stock is in a well-defined downtrend. The stock is nearing oversold territory with a RSI of 33, 30 or less is considered oversold.

I can't take AMD out of the penalty box. Avoid the stock. The downturn in PC sales is weighing on the stock.

Clearwire Corporation (CLWR)

The company is trading 44% below its 52-week high and has 61% upside potential based on the analysts' mean target price of $2.38 for the company. Clearwire was trading Tuesday at $1.48, flat for the day.

Fundamentally, Clearwire has very few positives. EPS is up 56% quarter over quarter. Clearwire guided revenue and EBITDA higher for the full year on July 26th at the Q2 earnings release. On the other hand, Clearwire is burning through cash and has a significant debt load.

Technically, Clearwire went on a massive run after positive comments were made at the earning conference call. The stock is currently trading just above the 50-day moving average. The stock has been consolidating for the last month after the parabolic move higher.

Clearwire's recent run was most likely primarily due to short covering after the CFO talked about the possibility of an upcoming strategic transaction on the conference call. He stated:

As we consider our longer-term liquidity needs, we expect to receive future LTE payments from Sprint and continue to evaluate all potential sources, particularly strategic transactions and asset sales.

I like the stock here as a speculative buy.

Groupon, Inc. (GRPN)

The company is trading 85% below its 52-week high and has 59% potential upside based on the consensus mean target price of $7.67 for the company. Groupon closed Tuesday at $4.83, down over 7% for the day on no real news.

Fundamentally, the stock has positives. The stock has a forward P/E ratio of 13.40 and trades for 10 times free cash flow. EPS and sales are up substantially quarter over quarter. EPS next year is expected to rise by 100%.

Technically, the stock is in a well-defined downtrend, yet has leveled off some over the past month. The stock just broke below the $5 mark which is a huge negative for the stock.

The company is not currently profitable. I signed up for the service, but quickly found it useless and unsubscribed. A local clone of the product called Clickedin serves my purposes much better. I just don't buy into the company being able to monetize a coupon service. Supposedly they are working on developing different streams of income, but don't hold your breath. This is an unproven social media stock I am not willing to speculate on. Avoid the stock.

Nokia Corporation (NOK)

The company is trading 61% below its 52-week high and 6% above its consensus mean target price of $2.53 for the company. Nokia was trading Tuesday for $2.70, down over 1% for the day.

Fundamentally, Nokia has some positives. Nokia is trading for approximately 87% of book value and only 24% of sales. EPS next year is expected to rise by 83%. Nokia pays a dividend with a 9.36% yield.

Technically, the stock has rebounded nicely since July and is currently in the beginnings of establishing an uptrend. The stock has continued to post higher highs and higher lows.

The win by Apple (NASDAQ:AAPL) over Samsung (OTC:SSNLF) regarding handsets seems to have provided an opening for Nokia. With Microsoft (NASDAQ:MSFT) backing Nokia, things just got interesting for this stock.

The risk/reward ratio looks positive for the stock here. The stock is a buy. Nokia is up 60% since July. With a dividend yield of nearly 10%, the stock looks attractive at this level. Nokia is a buy here.

The Bottom Line

The focus of the markets will most likely be on Europe Wednesday. The market began to drop precipitously late Tuesday as riots broke out in Spain over potential austerity measures being implemented. I see the potential sell off of stocks due to macro issues as a potential buying opportunity. We are entering a seasonally favorable period for the tech sector. The fourth quarter is traditionally bullish for tech stocks.

If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk. You can also set a 5% trailing stop loss order if you wish to minimize losses even further.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLWR, ALU, NOK over the next 72 hours. 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.

Disclaimer: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.