AA, GLW, LUV, TEVA, WDC, LLL, CVC and BAC
October may have been one of the best months for stocks in a generation, and the market may have stabilized, but there are still many stocks that were left for dead. These oversold stocks were simply punished too hard before the recovery, or they have not recovered as much as the overall market. 24/7 Wall St. has identified seven great companies that should recover nicely in a normalized or less-chaotic environment in the months ahead.
In order to start appreciating in value, most of these stocks do not need significant economic recovery, but rather a less choppy climate. The seven grossly oversold stocks are: Alcoa Inc. (NYSE: AA), Cablevision Systems Corp. (NYSE: CVC), Corning Inc. (NYSE: GLW), L-3 Communications Holdings Inc. (NYSE: LLL), Southwest Airlines Co. (NYSE: LUV), Teva Pharmaceutical Industries Limited (NASDAQ: TEVA), and Western Digital Corporation (NYSE: WDC).
A possible runner-up candidate is Bank of America Corporation (NYSE: BAC) but caution here is important, especially if the climate for banks remains on its current course.
1. Alcoa Inc. (NYSE: AA)
> Price $10.67
> 52-week range $8.45 to $18.47
> Analyst target $13.27
> Market cap $11.3 billion
The good news for the aluminum giant is that the company’s outlook does not exactly predict a recession. The outlook, given at the last earnings report, was not full of great growth expectations either. Alcoa is still maintaining that the aluminum market is set to double between now and 2020, something that many other industries may not experience. Shares may be up 20% from recent lows during the panic selling, but this one also would have to run more than 50% before hitting the year’s high. Alcoa has been thrown around as a takeover candidate by some, and shares were above $40.00 in 2008 before the recession went into full swing. Even without meeting analyst price projections or its recent highs, this stock could easily get back up to $14 or $15 during the next metals recovery cycle.
2. Cablevision Systems Corp. (NYSE: CVC)
> Price $15.00
> 52-week range $14.18 to $38.08
> Analyst target $24.29
> Market cap $4.3 billion
If you only watched the shares of Cablevision, you might think that cable was a dying business. The company has moved beyond the spin-offs of Madison Square Garden and AMC Networks, which distorts the 52-week and two-year trading ranges. While at the moment the chances of Cablevision being a takeover candidate are low, the Dolan family has tried to buy it previously at much higher prices. That deal was rejected. Some might argue that the value of the sum of its parts are greater than the company’s current valuation, but we believe that even on a standalone basis the stock is oversold. The cable company now has a high dividend yield of about 4% as a result of the share price depreciation. Even after the AMC spin-off shares went from $25 to under $15, and the company trades at barely 10 times 2012 earnings estimates. CVC is easily a $20 stock as standalone. In a buyout scenario, a recent Barron’s article put it at $30.
3. Corning Inc. (NYSE: GLW)
> Price $14.54
> 52-week range $11.51 to $23.43
> Analyst target $18.31
> Market cap $22.9 billion
Corning may be facing challenging TV and Monitor glass sales this holiday season as well as tougher competition trying to take away market share. Still, the company known as “GlassWorks” always has managed to be the leader in its industry and is the best of its class in advanced glass (think Gorilla Glass). Yet it barely trades above its tangible book value. Corning has recently bumped up its dividend, and it has a fresh new $1.5 billion share repurchase program that some investors may consider a floor under the stock. Insiders have been buying as well. Corning always gets oversold during extreme periods, but it has also always managed to recover and more. The stock trades at under 8-times expected earnings for both 2011 and 2012. For a company that usually has to fight low valuations before coming back, Corning should get back up to $20 eventually.
4. L-3 Communications Holdings Inc. (NYSE: LLL)
> Price $69.00
> 52-week range $58.30 to $88.55
> Analyst target $75.40
> Market cap $7.1 billion
L-3 Communications remains a sum-of-the-parts story inside a defense sector that may remain under pressure in the years ahead. The difference is that L-3 has not recovered as much as many of its peers, and it has more room to run before it gets close to the 52-week highs. The company operates in several industry sectors, including command, control, communications, intelligence, surveillance and reconnaissance systems, as well as aircraft modernization and maintenance, and government services. Some believe that its business segments will hold up as governments begin to cut defense spending as part of austerity measures. L-3 has been considered by some defense investors as a company that could be acquired, but the company has made acquisitions. Also, its 2.7% dividend yield has room for improvements.
5. Southwest Airlines Co. (NYSE: LUV)
> Price $8.45
> 52-week range $7.15 to $14.32
> Analyst target
> Market cap
Southwest Air is not as frequently considered a discount airline compared to years past, but it remains the most passenger-friendly carrier in the sky. It is also still digesting the AirTran acquisition and is much more subject to the price of jet fuel than it was from 2006 to 2008. Shares sold off from $12 to $8 during the summer sell-off and went well under $8 during the peak selling in late-September and early-October. Southwest has perhaps the best safety record despite recent woes, and is a much better run company than its peers. The company pays only a 0.2% dividend yield, but that is actually one of the few dividends in the sector, and we think it has better earnings predictability than peers. Southwest should recover considerably unless the market tanks or unless an unforeseen event occurs.
6. Teva Pharmaceutical Industries Limited (NASDAQ: TEVA)
> Price $40.85
> 52-week range $35.00 to $57.08
> Analyst target $56.00
> Market cap $36.3 billion
If you’ve been following the company news and the price reaction of Teva shares, you would assume that deep problems are persisting company-wide. That is not quite the case despite problems with tests in its brand name drug trials. The company has been expanding into new markets with selective acquisitions. The stock peaked in early 2011 north of $57, but was down as low as $35 by September. Our take is that investors have nearly fully discounted Teva’s name-brand sales and now value just its generic drug operations. That valuation-case is probably up for debate, of course, but the sell-off in late summer turned a weak situation into an awful situation. Analysts see nearly 40% upside. Teva should probably be worth closer to $50 in a base-case or normalized case..
7. Western Digital Corporation (NYSE: WDC)
> Price $27.40
> 52-week range $22.64 to $41.87
> Analyst target $22.64 to $41.87
> Market cap $6.4 billion
Western Digital competes head to head with Seagate, but it is Western Digital that is currently experiencing difficulties. The company ran into serious manufacturing problems after the floods in Thailand took out a key facility. The company is now expected to have losses for the next two quarters. On top of that, drive-makers and storage device makers have a never-ending battle of falling product prices. For example, 1 Terabyte of external storage can now easily be purchased for under $100 at your local technology and electronics retailer. An acquisition has been ongoing, but valuations here have been dirt cheap at 6-times to 7-times expected 2012 earnings estimates. All things being equal, Western Digital shares were sold off too much. WDC could easily get back up to $35 if it can get back on track in the near future.
Bank of America Corporation (NYSE: BAC)
> Price $6.35
> 52-week range $5.13 to $15.31
> Analyst target $9.90
> Market cap $64 billion
Bank of America is mentioned here only as a runner-up. We did not want to include banks in this analysis, and BofA is the only financial stock of this oversold lot. The bank is still the most sold off among the money-center banks and of the too-big-to-fail banks. BAC shares dropped nearly 60% today and is off much more in the last two months. Everything is against it: Washington D.C., lame debit card fees (recently dropped), mortgage mess, swipe fees, foreclosure practices, blocked settlements, management’s abilities challenged, and more. The bank also is in an environment where it cannot make anywhere close to normalized earnings. Also, the interest spreads are low, and it is required to hold so much in reserves that it cannot get aggressive on the lending front. Still, when considering that BofA shares went under $6.00 and that Warren Buffett took a $5 billion preferred share and warrant stake it looks like the worst has been seen, so long as the market does not roll back over into oblivion.
JON C. OGG