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5 Big Losers Ready to Bounce - 16644 views
MINNEAPOLIS (Stockpickr) -- There is a perception among some casual observers of the market that all stocks are created equal. They are not.
Since the end of April, stocks have been in decline, with the major market indices flirting with the established definition of a market correction being down nearly 10%. Within that construct, there have been huge losers that have lost substantially more than 10% of their market value.
At the moment, the S&P 500 is down about 5% since the end of April. After an impressive two-year rally from the perilous bottom reached in the spring of 2009, it was only natural for stocks to take a bit of a breather. Helping seal the pessimistic tone of the last month or so is an economy that remains tepid in its recovery.
Employment -- and, as a result, consumer confidence -- is weak. So, too, is business confidence. At the same time, commodity prices are on the upswing. Add in the debt crisis in Europe and it is easy to see why investors are skittish about stocks.
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Current losses on the major indices present few opportunities. For those companies that have lost substantially more, there is blood in the street. For contrarian investors, these are the names that I would focus on today. Historically, buying stocks that are substantially lower after a market selloff can be a rewarding investment strategy.
Considering the strong operating performance of many publicly traded companies, the time to buy is now. Here are five big losers that I expect to bounce back in the very near future.
Research in Motion
BlackBerry maker Research In Motion’s (RIMM) fall from grace has been stunning. Shares have been weak for some time as the company faced intense competition from Apple’s (AAPL) unique innovations and superior marketing. Slow to react to the challenges, management further stunned investors last Friday thanks to a weak forecast and possible delays in products coming to market.
Already depressed, shares dropped by 19% in one day. Since the end of April, shares of Research In Motion are down a whopping 41%. On June 15, with the stock weak, I suggested that there was more room for Research in Motion to fall. I named the stock as a possible short in a pair trade combination.
Now with the stock absolutely trounced, I expect it to bounce back as the market rediscovers its mojo. The company has been severely punished for losing the smartphone and tablet computer battle. That said, Research In Motion has many loyal customers that are strong enough in numbers to ensure that the company survives.
With the recent selling, Research In Motion offers compelling value. The company is extremely profitable. The Wall Street average estimate for the current fiscal year ending Feb. 28, 2012, is $6.28 per share. The following year's average estimate is for a profit of $6.53. Clearly there is no sign of panic from Wall Street in regard to operating profits shrinking.
At current prices, shares trade for just 4 times current year estimates. That is pretty cheap no matter the challenges, and it lowers the risk of loss for new investors. I would buy this stock looking for a bounce back of some significance.
The recent soft patch in the economy has investors rightly concerned about the health of the consumer. That fact has resulted in selling pressure for many retail stocks in the market. Apparel footwear and accessory marketer and distributor Skechers (SKX) has been under siege from bearish investors. Shares are down 24% since the end of April.
Going further back, Skechers has been really struggling over the past year. Last summer the stock peaked at $44.90 per share. Today you can buy the stock for $14.47 per share. That’s a drop of 68%. Has the worm turned and a bottom put in?
Shares are down for good reason. The company has missed estimates over the last three quarters. For the quarter ended March 31, Skechers made a profit of 24 cents per share. The average estimate called for 30 cents per share. If you can get past the earnings misses, the company is attractive from a valuation standpoint.
For the current year, the company is expected to make a profit of 68 cents per share. In the following year, the profit expectations increases 122% to $1.51 per share. At current prices the stock trades for just 10 times 2012 earnings estimates. If the company can play the beat-the-number game, this stock could reverse in a hurry.
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Cooper Tire & Rubber
Have you overthought the solution to a problem? I see market participants doing this often. The wheels of analysis can spin too far, too fast without supporting facts. What we get then is speculation that can run rampant when stocks move in one direction or the other. Concerns about the economy and trickle-down problems caused by a default in Greece have the market in just such a moment of overthinking.
That overthinking extends to individual stocks. Case in point is Cooper Tire & Rubber (CTB). Since April, shares of the company are down 26.5%. Those losses erased much of the gains the company had seen since September of last year. During that time the company has done nothing but perform on an operating basis, with two out of the last three quarterly earnings reports beating or matching average Wall Street estimates.
From a valuation perspective, it is all cylinders go. For the year ending Dec. 31, 2011, Wall Street is looking for a profit of $2.30 per share, with 18% growth the following year to $2.71 per share. Those numbers give the company a valuation of just 8.5 times current-year estimates. That is an absolute steal in my opinion.
Any time you can buy 18% growth for less than 10 times earnings, big gains usually follow. Get this one before the bounce.
It is said that technology stocks lead the market higher. When the economy is firing on all cylinders, business turns to tech companies. The thirst for increased productivity solidifies technology's key role in a growing economy.
Unfortunately, the flip side is also true.
Technology stocks have been hit hard during the several weeks of selling on the market. Juniper Networks (JNPR), a key player in Internet infrastructure, has seen its shares drop by 23% since the end of April. That’s more than double the loss seen in the major indices over the same period. The good news is that when the market turns, so will Juniper.
The sharp decline should be viewed as temporary blip and an opportunity to buy shares of a large and successfully growing technology stock. Over the last year the company has had a strong track record of meeting or slightly beating average Wall Street estimates. Despite the soft patch in the economy, there is no indication that such performance trends will end any time soon.
For the current year, the estimate is for the company to make $1.52 per share. In 2012, the estimate is for profit growth of 24% to $1.88 per share. In 2010, Juniper made a profit of $1.15 per share. If the company stays on track for the remainder of the year, 2011 results would represent a 32% improvement. Investors can buy that growth for just 19.5 times current-year estimated earnings.
Two years of more than 20% profit growth is impressive indeed. Any price below that growth rate is an entry point in the stock, in my opinion. Explosive growth of the mobile internet fueled by smartphone growth ensures that Juniper can grow at this rate for the foreseeable future. The only reason not to own the stock here is if you think the economy will collapse. We may be growing at a snail’s pace, but I just don’t buy the collapse argument.
Buy Juniper expecting a nice bounceback rally in July.
You know the markets are haywire when normally defensive stocks trade with lots of volatility. By its nature, a defensive stock is supposed to protect investors against market declines. They may not move up as much in a rising market, but that is not the point of owning a defensive name. The point is to preserve capital.
So investors in Pilgrim’s Pride (PPC) must be going a bit batty of late. The large chicken producer has seen its stock drop substantially since the end of April. Shares are down 10% -- though they did spike up 14% on the day yesterday thanks to a Wall Street upgrade on the stock.
The big reason for the decline is inflation -- or the perceived destruction that inflation can bring to even the most defensive names in the market. Increased expense to raise and produce chickens without the ability to raise prices to the end consumer can reap havoc on profits. Since profits ultimately determine value, a slashing thereof gives bearish investors plenty of reason to sell.
The evidence of a profit decline for Pilgrim’s Pride appeared in April when the company reported that earnings for the quarter ending March 31 greatly missed expectations. The company lost fifty six cents per share. The average Wall Street estimate for the period was for a loss of twenty two cents per share.
If the inflation spike earlier this year is temporary as viewed by the Federal Reserve, Pilgrim’s earnings performance should get back on track. The stock will recover too.
To see these stocks in action, visit the 5 Big Losers Ready to Bounce portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.