The stocks discussed in this article are on sale at nearly half price right now. Many stocks are beaten down currently in the S&P, with the correlation in stocks being at the highest levels in years. These are seven underperforming stocks in the S&P year-to-date that have a $2 billion market cap or better and are off their 52-week highs by at least 35%.
Everyone loves a sale. When things are on sale, sometimes there is a good reason; other times it’s because someone is moving and they have to get rid of their belongings at bargain basement prices (such as a yard sale). I submit that some of the following stocks fall into the latter category, but of course one person’s trash is another person’s treasure, so please use this list as a starting point for your own due diligence. Everyone’s risk tolerance is different, and there is definitely risk involved in buying stocks at their lows in a volatile market.
Trying to ignore the macroeconomic noise and negative headlines is hard. Buying low is not an easy thing to do, I know, but if you have a long-term time horizon, you will most assuredly make money picking up distressed shares in solid companies at this very time. Markets don’t stay down or up for long, or Wall Street wouldn’t make any money. Wall Street traders thrive on volatility. Markets fluctuate on a continuum, and we are bouncing along the bottom of it right now -- ergo, it’s time to load up. The very bottom of the market, during March 2009, was the time to buy, but no one I knew was buying -- everyone was running for the exits at the exact time they should have been piling in.
Warren Buffett invested $5 billion in Bank of America (BAC) recently. Bank of America announced the investment, declaring it would sell Buffett cumulative perpetual preferred stock, which pays an annual dividend of 6%, and give him a warrant to buy 700 million shares at roughly $7.14 each. Regardless of massive market losses year to date, Buffett says Bank of America is still a “strong, well-led company,” and he is “impressed with the profit-generating abilities of the franchise.”
Nevertheless, Buffett took a lot of heat for making this bold play. Most investors are steering exceedingly clear of financials now, especially Bank of America. I have a certain affinity for Buffett, the Oracle of Omaha, as I was born in that great city myself. Furthermore, I have learned from experience that Buffett’s proverbs are words to live by, and that following his footsteps (whenever possible) will make you money.
Many analysts are predicting a recession going forward. I don’t see it happening. How soon we forget: Just a few months ago you heard the odds of a double-dip recession were minimal, and now it is virtually assured, according to the crowd. In my experience, the crowd is usually wrong. There may be more volatility in front of us, even with the more than 10% drop in the market recently and the inevitable restructuring of Greek sovereign debt; nevertheless, this may be a good point to start a position in these buying opportunities. I suggest you buy a basket of stocks and start with a quarter or a tenth of a position at a time. I believe we are nearing the end of the correction, and it’s time to start nibbling at the amazing buying opportunities created. Many stocks look really cheap and may rebound simply due to the mean reversion theory.
The mean reversion strategy is based on the mathematical premise that all prices will eventually move back towards the mean, or average, return. Thus, if a stock is underperforming, its price will move towards its average value when the market rebounds. Many of these stocks have been taken down in sympathy with the global market sell-off or due to headline risk. Stock market correlation is at an all-time high, but when the market recovers, I expect these stocks to experience a significant rebound.
With the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation, driving investors into stocks in search for yield. The Federal Reserve guaranteed super-low interest rates for two more years, an unprecedented step to arrest the alarming decline of the stock market and the economy. Bernanke went on to say he expects growth to pick up in the second half of the year. Furthermore, the ECB seems to be stepping up and putting together a TARP-like plan of action that may finally put an end to the contagion fears of the European countries. This bodes well for stocks, creating a virtual win/win scenario for equities.
It is hard to think beyond the current state of affairs when negative preoccupations always seem to repeat themselves and you seem to be stuck in a revolving door of misery, but the carousel ride of horror inevitably ends, the storm clouds clear and you feel that first ray of hope shine down on your face. The problem is it’s already too late to buy due to the fact all the smart savvy investors bought in and ran up the price while you were hiding in your storm cellar. Fortune favors the bold; hopefully you can take advantage of these amazing buying opportunities.
Moreover, most of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments and positive catalysts for future growth. Below is a table with detailed statistics regarding each company’s current summary and performance information, followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity, followed by a chart of the company's key statistics. Nonetheless, this is only the first step in finding winners for your portfolio. Please use this as a starting point for your own due diligence.
The seven S&P 500 stocks are: AFLAC Inc. (AFL), The Goldman Sachs Group, Inc. (GS), Ford Motor Co. (F), PACCAR Inc. (PCAR), Peabody Energy Corp. (BTU), The Bank of New York Mellon Corporation (BK) and MetLife, Inc. (MET).
Current Performance Statistics (Click table to enlarge)
Company Reviews:
Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance. The company is trading above analyst estimates. Aflac has a median price target of $61 by 16 brokers and a high target of $75. The last up/downgrade activity was on Apr 18, 2011, when Barclays Capital initiated coverage on the company with an Overweight rating.
The Goldman Sachs Group, Inc., together with its subsidiaries, provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. The company is trading significantly below analyst estimates. Goldman Sachs has a median price target of $152.91 by 22 brokers and a high target of $205. The last up/downgrade activity was on Sep 7, 2011, when Oppenheimer downgraded the company from Outperform to Perform.
Ford Motor Company primarily develops, manufactures, distributes, and services vehicles and parts worldwide. It operates in two sectors, automotive and financial services. The company is trading significantly below analysts' estimates. Ford has a median price target of $17 by 15 brokers and a high target of $24. The last up/downgrade activity was on Oct 14, 2010, when Deutsche Bank upgraded the company from Hold to Buy.
Peabody Energy Corporation, through its subsidiaries, engages in the exploration, mining, and production of coal. The company is trading significantly below analysts' estimates. Peabody Energy has a median price target of $71 by 20 brokers and a high target of $81. The last up/downgrade activity was on Oct 8, 2010, when BMO Capital Markets downgraded the company from Outperform to Market Perform.
PACCAR Inc, together with its subsidiaries, designs, manufactures, and distributes light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe. The company is trading significantly below analysts' estimates. PACCAR has a median price target of $55 by 17 brokers and a high target of $61. The last up/downgrade activity was on Jul 29, 2011, when McAdams Wright Ragen upgraded the company from Hold to Buy.
The Bank of New York Mellon Corporation, a financial services company, provides various products and services worldwide. The company is trading significantly below analysts' estimates. Bank of New York Mellon has a median price target of $29 by 21 brokers and a high target of $40. The last up/downgrade activity was on Nov 11, 2010, when Jefferies initiated coverage on the company with a Hold rating.
MetLife, Inc., through its subsidiaries, provides insurance, annuities, and employee benefit programs primarily in the United States, Japan, Latin America, the Asia Pacific, Europe, and the Middle East. The company is trading significantly below analysts' estimates. MetLife has a median price target of $54 by 15 brokers and a high target of $60. The last up/downgrade activity was on Apr 18, 2011, when Barclays Capital initiated coverage on the company with an Overweight rating.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AFL, BK, F or MET over the next 72 hours.
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