The stock market has rallied sharply every since the Federal Reserve announced it would go forward with another round of quantitative easing. The Fed-fueled rally has led many stocks to trade at or near new 52-week highs, and this means it is tougher to find bargains in the stock market. However, there are still some highly undervalued stocks to buy now, if you are willing to consider out-of-favor sectors.
The auto sector has been and remains cheap even though car sales have been generally strong. One of the best values in this sector appears to be Goodyear Tire (NYSE:GT). This company owns and manufactures famous tire brands like Goodyear and Dunlop, and it also operates a number of retail auto service and tire installation centers throughout the United States. Here are 3 positives for Goodyear shares that could lead to gains of 50% or more:
1) There are a couple of factors that could boost profit margins for Goodyear in the coming quarters. One is the fact that the price of rubber has been dropping, which reduces manufacturing costs for tiremakers. The other is that the price of oil has dropped about 9% in the past few weeks and that also reduces manufacturing and shipping costs.
2) Like many American companies, Goodyear has pension funding obligations and this concern has kept some investors out of the stock. However, fears about pension expenses appear overdone and might already be priced into the stock. Earlier this year, a new Congress-approved pension stabilization legislation was signed into law which helps relieve the pressure to fund pension obligations.
3) Goodyear appears significantly undervalued when considering a number of fundamental metrics. For example, Goodyear is expected to earn nearly $2 per share, which puts the price to earnings ration at just about 6. By comparison, the average stock in the S&P 500 Index trades for about 15 times earnings. Goodyear also has a solid balance sheet with about $2.16 billion in cash and around 5.6 billion in debt.
More analysts are starting to take notice of this stock. Goldman Sachs (NYSE:GS) recently said that Goodyear shares were a "buy" and it set a $17 price target. This would give investors who buy now, just about a 50% gain, if it hits the target.
Here are some key points for Goodyear:
Current share price: $12.45
The 52 week range is $9.24 to $15.80
Earnings estimates for 2012: $1.87 per share
Earnings estimates for 2013: $2.43 per share
Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
Disclosure: I am long GT. 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.