Overview
I have selected five companies with recent news or upcoming earnings announcements to review. I believe three are poised to move higher based on upcoming catalyst while two will most likely drop in value or be dead money near term. 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 catalyst.
Company Reviews
The following table depicts summary statistics and Wednesday's performance for the stocks.
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Advanced Micro Devices, Inc. (AMD)
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AMD is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and has 42% potential upside based on the analysts' consensus mean target price of $7.05 for the company. AMD was trading Wednesday for $4.91, up almost 1% for the day.
Fundamentally, AMD has some positives. AMD trades for 8.43 times free cash flow. The company has a forward P/E of 6.89. EPS next year is expected to rise by 18.92%. Insider ownership is up 49% over the last six months. AMD's RSI is 35.
AMD shareholders have been whipsawed throughout 2012. The stock had an incredible run from $5 to $8.25 in the first quarter only to see the stock crate to below $5 in mid-July on a Sterne Agee downgrade. Intel (INTC) recently give a gloomy outlook which has exacerbated the move downward. The company reports earnings tomorrow after the close. I believe all the bad news is baked in the stock. AMD could possibly be one of the contributors to INTC's weakness. I don't see the stock staying below $5 for long. I like the stock going in to earnings.
Bank of America Corporation (BAC)
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BAC is trading well below its consensus estimates and its 52 week high. The company is trading 25% below its 52 week high and has 35% upside based on the analysts' consensus mean target price of $10.36 for the company. BAC was trading Wednesday for $7.59, down 4% for the day.
Fundamentally, BAC has several positives. The company has a forward PE of 8.25. BAC is trading for 1.79 times free cash flow and approximately one third of book value. EPS next year is expected to rise by 68%. Insider ownership is up 93% over the past six months.
I got BAC wrong. I thought with the good reports out of JPMorgan (JPM) and Wells Fargo (WFC) BAC would beat estimates as well. They did not. BAC's second-quarter results were tarnished by record claims for refunds on defective mortgages. This issue coupled with a potential investigation regarding Libor rates and you have a recipe to stay away until the new issues are cleared up. I would avoid BAC for now.
Ford Motor Co. (F)
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Ford is trading well below its consensus estimates and its 52 week high. The company is trading 29% below its 52 week high and has 51% upside based on the analysts' consensus mean target price of $14.17 for the company. Ford was trading Wednesday for $9.40, up almost 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 5.87. Ford is trading for 7.56 times free cash flow and 2.16 times book value. EPS next year is expected to rise by 20.45%. The company pays a dividend with a yield of 2.14% and has a PEG ratio of 0.25.
Ford reports earnings on July 25th. The stock is resting at just 5% off its 52 week lows. $9 has been significant support for the stock. The European situation is completely baked into the stock at this level. I see an opportunity for Ford to surprise to the upside this time. U.S. auto sales are up and Ford stands to benefit. They have disappointed me for the past two quarters; nevertheless, I believe they will pull off a beat this quarter based on lowered expectations.
Ford could see 39% upside, JPMorgan's Brinkman argues, rising to $13 per share. Ford's North American operations are "lean and highly profitable" and it is producing "desirable new products that are global in nature." Ford shares rose 1.2% to $9.45. The stock is a buy here.
Southwest Airlines Co. (LUV)
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Southwest is trading below its consensus estimates and its 52 week high. The company is trading 11% below its 52 week high and has 27% upside based on the analysts' consensus mean target price of $12.07 for the company. Southwest was trading Wednesday for $9.46, up almost 1% for the day.
Fundamentally, Southwest has many positives. Southwest trades for 12.16 times free cash flow. The company has a forward P/E of 8.61. EPS for the next five years is expected to rise by 30%. Insider ownership is up 79% over the last six months. The company is trading for book value and has a PEG ratio of .90.
Southwest's stock recently achieved the coveted golden cross, where the 50 day sma eclipses the 200 day sma. This is considered to be a very bullish sign for a stock. The combination of lower oil prices and zero exposure to Europe make this stock very appealing. The stock has been in a well-defined uptrend since late April. I opened a position in the stock prior to earning being announced after the market close tomorrow. I expect Southwest to beat the street's expectations. The stock is a Buy.
Regions Financial Corp. (RF)
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Regions is trading somewhat below its consensus estimates and on par with its 52 week high. The company is trading 3% below its 52 week high and has 23% potential upside based on the analysts' consensus mean target price of $12.07 for the company. Regions was trading Wednesday for $6.72, down almost 2% for the day.
Fundamentally, Regions has many positives. Regions trades for 2.59 times free cash flow. The company has a forward P/E of 8.90. EPS next year is expected to rise by 28%. The company is trading for approximately two thirds of book value.
The stock looks price for perfection to me at this point. With earnings coming up on July 24th, I would take profits in the stock at this juncture if I was up significantly. The stock seems unable to pierce the $7 may high. Deutsche Bank downgraded the stock in June and lowered their target price to $6.50. I would avoid the stock prior to earnings. You may get a chance to pick it up at a better price.
Conclusion
These stocks have upcoming catalysts that will move share prices up or down significantly. Three look poised to move higher while two may have headwinds on the horizon. I am not saying I think BAC and Regions are bad companies. I am saying the risk/reward ratio on these stocks is unfavorable. Avoid them for the near term.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in at least 10% at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss if you wish to minimize losses even further.
Disclosure: I am long LUV.
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