5 Stocks Poised To Break Out To The Upside
By David Alton Clark - Disclosure: I am long F.
The Gist
The markets have roiled drastically over the last few years due to the Eurozone debt debacle and other macro-economic and geopolitical issues. Some stocks have seen resurgence in 2012, yet many are still trading at significant discounts to forward earnings. The market as a whole is trading at a 17% discount to projected earnings.
Furthermore, Wednesday the Fed reiterated it will continue to employ quantitative easing until certain economic indicators are met which should continue to underpin the markets providing the so called "Bernanke Put." Based on these assumptions I believe the risk reward for starting positions in stocks on your watch list that you perceive to be undervalued now is prudent. Thus, now is the time to start taking action.
I started a position in Ford (F) recently for this reason. I believe the company is undervalued and is well positioned to take advantage of the resurgence in new car buying as evidenced by the current uptick in sales. I posit this is just the beginning for these stocks which may present excellent buying opportunities at current levels.
The Goods
In the following sections, we will perform a review of the fundamental and technical state of each company under review followed by an analysis of the underlying catalysts for the stocks. The following table depicts summary statistics and Wednesday's performance for the stocks. The following charts are provided by Finviz.com.
(click to enlarge)
Alcoa, Inc. (AA)
The company is trading 20% below its 52-week high and has 22% potential upside based on the consensus mean target price of $10.47 for the company. Alcoa was trading Wednesday for $8.62, down slightly for the day.
(click to enlarge)
Fundamentally, Alcoa has several positives. The company has a forward P/E of 12.91. Alcoa is trading for 68% of book value. The company pays a dividend with a yield of 1.39%. Alcoa's projected EPS growth rate for next year is 158%.
Technically, the stock has fulfilled a double bottom reversal pattern and looks poised to move higher. The stock is currently testing resistance at the 50-day sma and been in a solid uptrend since mid-November.
Alcoa stated in its last conference call it expects aluminum prices to double by 2020. According to a news release by Business Wire, Alcoa has announced that its Alcoa Wheel and Transportation (AWTP) business is opening a production facility in Suzhou, China, marking an expansion that creates a full wheel manufacturing, distribution, sales and service network in China. This bodes well for Alcoa. The Chinese like to buy from companies which produce their product in country.
You have to buy low to sell high and this may be that opportunity. Alcoa has become lean and mean over the last couple of years. If an uptick in demand or aluminum prices occurs, Alcoa shares could experience an outsized gain compared to the market in general. I like the stock here.
Citigroup, Inc. (C)
The company is trading 3% below its 52-week high and has 22% upside potential based on the analysts' mean target price of $43.33 for the company. Citigroup was trading Wednesday for $37.44, down slightly for the day.
(click to enlarge)
Fundamentally, Citigroup has several positives. The company has a forward P/E of 8.04. Citigroup is trading for a 40% discount to book value. The company has a PEG ratio of 1.37 and a net profit margin of 10.95%. Director William S. Thompson bought 6,850 shares of stock recently.
Technically, the stock had a recent downturn which coincided with the recent election. Even so, it has snapped back significantly in recent days. The golden cross was recently achieved at the beginning of October. This is a bullish indicator that has served me well. Recently the stock appears to have gone into a holding pattern as Washington hashes out the fiscal cliff issue.
According to a recent article penned by Bank of America Merrill Lynch,
"Citi is an underappreciated beneficiary of the housing recovery and remains inexpensive and underowned by active managers."
I couldn't agree more and thank BAC for underpinning my thesis. Citigroup is well positioned to take advantage of the uptick in the U.S. housing market. The U.S. housing market is on the mend and Citi stands to gain from it. I like the stock for a long-term play on U.S. housing. The fact that it is still trading in the thirties is icing on the cake.
Ford Motor Co.
The company is trading 12% below its 52-week high and has 30% upside based on the analysts' mean target price of $14.67 for the company. Ford was trading Wednesday for $11.29, down almost 2% for the day.
(click to enlarge)
Fundamentally, Ford has several positives. The company has a forward P/E of 7.86. Ford is trading for 10.99 times free cash flow and 2.3 times book value. EPS next year is expected to rise by approximately 10%. The company pays a dividend with a yield of 1.74% and has a PEG ratio of 0.49 and a net profit margin of 13.36% and an ROE of 142%.
Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since the last quarter. Look at the chart. The stock has just achieved the coveted golden cross where the 50-day sma crosses above the 200-day sma. This is a significant event and should drive the stock higher as many technical traders use this as a bullish signal to buy.
According to a recent article penned by Bank of America Merrill Lynch,
"Ford was selected as one of the 10 best stocks for 2013 due to high foreign sales and a large amount of pent-up demand."
With Mulally sticking around and sales and profits growing, the stock remains a buy long-term. Bank of America Merrill Lynch has a $20 12 month price target on the stock. That is a nearly 100% gain over the next twelve months. If Ford even does half that I will be ecstatic. I like the stock here. I am long Ford.
Silver Wheaton Corp. (SLW)
The company is trading 10% below its 52 week high and has 29% potential upside based on the consensus mean target price of $47.79 for the company. SLW was trading Wednesday for $36.83, down over 3% for the day.
(click to enlarge)
Fundamentally, SLW has several positives. The company has a forward PE of 17.27. SLW has a PEG ratio of 0.67. SLW pays a dividend with a yield of .74% and, according to Finviz.com, has a net profit margin of 73.05%.
Technically, the stock looks great. The stock has bounced off a bottom of $22 in May and is now in a well-defined uptrend. The stock recently performed the coveted golden cross where the 50-day sma crosses above the 200-day sma. This is considered extremely bullish. The stock recently tested support at the bottom of the uptrend line and bounced back nicely.
Silver Wheaton is Scotiabank's mining analysis Trevor Turnball's top silver pick. He states,
"Silver Wheaton is in the midst of growing production at a rate of 70%, from 28 million to 48 million ounces of silver by 2016."
This is a play on the Fed's unending QE program as well as a safe haven play. Silver is the high beta version of gold so I prefer silver plays to gold plays. Silver Wheaton is a good proxy for silver and I expect the price of silver to rise eventually. Today's drop was due to the sell on the news phenomenon associated with Fed announcements. Now is the time to pick up shares. I like the stock here.
Valero Energy Corporation (VLO)
Valero is trading 4% below its 52 week high and has 20% potential upside based on the analysts' mean target price of $39.33 for the company. Valero was trading Wednesday at $32.66, down slightly for the day.
(click to enlarge)
Fundamentally, Valero has some positives. The company trades for 12 times free cash flow. Valero has a forward P/E of 6.85. The company pays a dividend with a yield of 2.15%. The company trades for slightly more than book value and EPS is up 127% this year.
Technically, the stock looks solid. The stock has been in an orderly uptrend since June. The coveted golden cross was achieved at the beginning of August where the 50 day SMA crosses above the 200 day SMA. This is one of my key buy indicators. The stock has recently come in and is currently trading slightly above the bottom of the uptrend channel. Historically, this has been an ideal time to start a position.
According to a recent article penned by Bank of America Merrill Lynch,
"Merrill Lynch expects an increase in cash returns for Valero stockholders in 2013 through dividends and buybacks."
This news bodes well for Valero. Nevertheless, I posit Valero has several more positive catalysts for future growth next year. The company should see significant upside as the infrastructure build out for the U.S. unconventional oil plays continues to mature. If the U.S. is to be the leading oil and gas producer by 2017, Valero will play a major role in the process. My analysis on Valero may be swayed due to the fact Valero is my hometown stock. Nonetheless, I believe the stock is a buy here.
The Bottom Line
I posit these equities will continue upward from their current share prices based on macroeconomic, sector and company specific catalysts. These stocks have great stories, good fundamentals and positive facilitators for future growth. However, many are trading at significant discounts due to incessant negative macroeconomic headlines and a lack of confidence from investors that the economic picture will improve anytime soon.
I suggest layering into these names as there may be a significant buying opportunity produced by the bureaucrats as they work their way through the so called fiscal cliff.
With China, Europe and the U.S. showing the propensity to ease monetary policy these stocks should do quite well in the coming years. Still, take your time building a position. One of the major factors affecting your potential return in a stock is your cost basis.
Additional disclosure: 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.
No comments:
Post a Comment