"The time to buy is when there is blood in the streets, even if the blood is your own."
This famous investing quote is attributed to Baron Rothschild, a member of the Rothschild banking family who made a fortune buying during the chaos following the Battle of Waterloo. There may not be blood in the streets, but these stocks have been severely beaten down in recent trading and are in intensive care right now.
Contrarian Mindset
How many beaten down stocks have you been shaken out of only to see them come roaring back when market sentiment changes? The answer is a whole bunch for me over the years. Apple (AAPL) is probably my biggest shake out, sold out years ago at $3 only to watch the stock soar higher year after year. Other comeback kids I missed out on are Amazon (AMZN), Valero Energy (VLO) and El Paso Energy (EP) to name a few.
Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market or company specific panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you have dry powder and take advantage. The market is clearly at an inflection point. To open a position you must have courage in your convictions. Just remember, fortune favors the bold. Market or company specific corrections often provide opportunities to buy great names at a discount price. The greatest determinant of profit potential is your buy in price point. One caveat is to place a tight stop of 5% to 10% below your buy in price and cut your losses if things go the wrong way with picks like these. Never fall in love with real estate or a stock is my greatest investing lesson learned.
The following are severely oversold stocks I see as hitting rock bottom now and trending up in the coming months. These are speculative contrarian picks. Some share prices are so low they could qualify as buying an option. The seven stocks in question are: Bank of America Corporation (BAC), Boston Scientific Corporation (BSX), Micron Technology Inc. (MU), Regions Financial Corp. (RF), Sprint Nextel Corp. (S), SIRIUS XM Radio Inc. (SIRI) and MEMC Electronic Materials Inc. (WFR). I will give a brief description of the mean reversion mathematical premise which may provide technical upward momentum for these stocks and then scrutinize each stock independently thereafter.
Underperformance May Lead To A Reversion To The Mean
The stocks covered are stocks trading enormously below their 52-week highs and down significantly in recent weeks and may be primed to rebound due to a reversion to the mean, if nothing else when the recovery gains viable traction. The mean reversion strategy is based on the mathematical premise that all prices will eventually move back toward the mean, or average return. Thus, if a stock is underperforming, its price will move toward 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.
Company Reviews
Current Performance Chart
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Company-Specific Analysis and Potential Catalysts
Bank Of America Corp. and Regions Financial Corp.
The banks are everyone’s punch horses right now. This is the time when I start to get interested. BAC and RF closed the day severely below their 52-week highs and near recent 52-week lows. Trading at fractions of tangible book, I think it’s time to start a position in these beaten down banks. I know Warren Buffett got a special deal for his investment in BAC and you shouldn’t jump in to a stock simply because a major player takes a position. But Buffett didn’t make the investment thinking the stock was going to zero and you are getting in at a much lower price than Buffett at this point. I like these two banks here for a trade at least.
Fundamental Statistics
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Bank of America
Regions Financial Corp.
Boston Scientific Corporation
Boston Scientific has a price to tangible book ratio of 0.7, a price to sales ratio of 1 and is 33% below its 52-week high. Boston Scientific recently announced the U.S. launch of its Charger PTA Balloon Catheter, a 0.035" percutaneous transluminal angioplasty (PTA) balloon catheter designed for a wide range of peripheral angioplasty procedures. The Charger PTA Balloon Catheter is Boston Scientific's third new peripheral balloon catheter introduced in 2011 and strengthens the company's position as a global leader in peripheral angioplasty balloons.
Fundamental Statistics
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Micron Technology Inc.
Micron has a price to tangible book ratio of 0.7, a price to sales ratio of 0.7 and is 52% below its 52 week high. Intel (INTC) and Micron recently extended their NAND flash technology leadership with the introduction of the world's first 128Gb NAND device and mass production of 64Gb 20nm NAND. The new 128Gb device is ideal for small form factor tablets, smartp hones, SSDs and high-performance compute devices.
News Highlights
- The new 20nm 128Gb MLC NAND device doubles the storage capacity and performance of the companies' existing 20nm 64Gb NAND device.
- Intel and Micron continue to lead the industry with the most advanced NAND production process technology, announcing mass production of their 20nm 64Gb NAND flash.
- The industry's first monolithic 128Gb part can store 1 terabit of data in a single fingertip-size package with just eight die - a new storage benchmark that meets the ongoing demand for slim, sleek products.
- The companies' 20nm NAND is the first to use an innovative planar cell structure that overcomes the scaling constraints of standard floating gate NAND.
Fundamental Statistics
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Sprint Nextel Corp.
Sprint has a price to tangible book ratio of 0.5, a price to sales ratio of 0.2 and is 62% below its 52-week high. I have a Sprint Android phone and Sprint service because it was the best value proposition. With coming U.S. consumer belt tightening and the leveling of technology regarding smart phones, I see Sprint taking market share from the competition and bouncing back. Virgin Mobile USA, one of Sprint's prepaid brands, offers millions of customers control, flexibility and connectivity through Virgin Mobile's Beyond Talk No Contract plans with unlimited data for mobile phone service including Android-powered smart phones and prepaid Broadband2Go high-speed Web access. Virgin Mobile branded devices are available at more than 40,000 retail stores. Top-Up cards are available at approximately 150,000 locations nationwide and can be used for Assurance Wireless and Broadband2Go services.
Fundamental Statistics
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Sirius XM Radio Inc.
Sirius has a price to tangible book ratio of 11.4, a price to sales ratio of 2.2 and is 26% below its 52-week high. This is one I have been in and out of over the years and was extremely bearish on since September. The price has undulated above and below the current price point for some time now and I believe the stock has formed a base and is ready for another run at the 52-week high when the calendar clicks over. This is strictly a trade for me. I will take profits at my price target of $2.35. Sirius XM Radio recently introduced the SiriusXM Edge Dock and Play Radio, the first satellite radio able to receive an expanded lineup of commercial-free music channels, sports and comedy, as well as SiriusXM Latino, a new suite of Spanish-language channels.
The launch of SiriusXM Edge is part of the first phase of SiriusXM 2.0, a major upgrade and evolution of Sirius XM's satellite and Internet delivered service that will ultimately span hardware, software, audio and data services. By employing highly efficient modulation and compression techniques introduced as part of 2.0 technology that effectively delivers 25% more bandwidth capacity, Sirius XM will expand its audio and data services without affecting the broadcast quality of existing channels.
Fundamental Statistics
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MEMC Electronic Materials Inc.
MEMC has a price to tangible book ratio of 0.4, a price to sales ratio of 0.3 and is a whopping 74% below its 52-week high. I made money on this name last year buying in at $9 and selling at $13 twice. Cramer made a call at the beginning of 2010 that this stock would hit $20. Never in my wildest dreams would I think it could get down this low. The solar sector is highly unloved at this time. Although if the Iranian situation gets out of control regarding the Strait of Hormuz you can bet your bottom dollar the share price will spike. On Monday a member of the Iranian parliament said the military was set to practice shutting the Strait of Hormuz, the world's most important oil shipping route.
Fundamental Statistics
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Conclusion
Although correlation in stocks is at an all-time high, I believe these stocks present a substantial buying opportunity and will outperform the market in 2012. I expect these stocks to experience a significant rebound based on several bullish company specific catalysts, technical indicators, the market's unending resilience in the face of continual negative headlines, the performance of S&P 500 stocks this earnings season, a bullish outside month in October, the coming resolution of the eurozone banking crisis and the fact that many investors have been shaken out of the market by the extreme volatility this year. Once they see stocks start to take off next year, the chase will be on and the flood of money coming in from the sidelines will create a significant rally.
Answer this question: How many times has the stock market roared back after a correction? The fact is, every time. If you told someone in 1987 on Black Monday that the Dow would be almost ten-fold higher within 20 years time, that person would have called you crazy, but you would have been correct. Who is to say how high the market can climb from here? Nevertheless, everyone has their own risk tolerance profile. Please use this information as a starting point for your own due diligence.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in S, BAC, SIRI, MU, WFR, RF, BSX over the next 72 hours.
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