Two Bullish Calls on Two of the Market’s Most Controversial Stocks

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A controversial stock is one that has both upside, downside, and in most cases long-term periods of either gains or losses. These are companies where opinions run high and investors are in constant attempt to find the best way to trade, invest, or play each stock. In this article I am providing my opinion for the best way to play two of the market’s most volatile and most controversial stocks.

Best Buy Might Finally Be Attractive

Last Thursday I wrote an article following the near 16% gain posted by Best Buy (NYSE: BBY). In the article I used words such as confusing, overplayed, and pricey to describe the stock and its performance following the rumors of a takeover. I suggested that investors not buy the stock on the notion that there would be a takeover, and that these rumors had been presented in the past with nothing to materialize.

Last Friday shares of Best Buy gave up all that it gained on Thursday. The loss came as a result of news that the deadline for a bid had been pushed back until February of 2013. In the previous article I said to sell the rumor, however what’s interesting about Friday’s news, and movement, is that it’s no longer a rumor; now we know that there will be a bid and that Schulze is showing serious interest.

At $12.00, shares of BBY remain controversial due to operational restraints, but undervalued because the company is trading with an unprecedented price/sales ratio of 0.09. So here goes, I’ve never said it before, but I think Best Buy is a “buy.” I think Richard Schulze and his partners are playing a strategic game of chess and have extended the bid time to drive the stock lower, in an attempt to make their bid more attractive.

Last week there was a report in which retail analysts stated that Schulze might very well have to present a $20 bid in order for the board to approve the takeover. However, Thursday’s rumor of a $5 to $6 billion offer would still be significantly short of this price. But, if the stock stays lower, near $12 or below, then Schulze’s $16-$17 offer becomes more attractive, and the board might approve in desperation. Ultimately, with a price/sales ratio of 0.09 this company is cheap, Shulze will most likely try to acquire, and it will most likely be sooner rather than later. I don’t suggest a large position, but a small position looks to have significant upside considering the valuation of this company.

Buy Apple Before the New Year

In the last three months shares of Apple (NASDAQ: AAPL) have lost nearly 30% of their value, or over $180 billion from its market cap. In the process, investors have been constantly attempting to call its bottom and determine a good buy point. The reason is because we know the company is poised to announce record earnings, has further product launches in the works, has the best ecosystem in the industry (making a consumer switch more unlikely), and is trading at 8.82 times next year’s earnings despite expected earnings growth of more  than 25%.

Due to the catalysts and value of Apple I believe it is an absolute “buy” right now, in part because of valuation and in part due to the workings of hedge funds. To better explain, allow me to provide a speculative explanation of the workings of a hedge fund. Apple has institutional ownership of nearly 70% and is the most held stock among almost all hedge funds. However, hedge funds, and all funds for that matter, have a perverse characteristic to chase momentum towards the end of the year; my guess is so that annual statements reflect better to shareholders, showing them that their hedge fund holds the “best” stocks.

A hedge fund will typically sell stocks that begin to underperform and load up on the best yearly performers towards the end of the year. With Apple having such a large institutional ownership and being so widely held, I have no doubt this has occurred with this stock. This might be speculative, but in reality, because of its institutional ownership and the rate of its decline, funds would have to be selling aggressively for it to fall by such a large extent.

 The good news is that much like Sprint, Bank of America, and other stocks that were obviously undervalued to begin 2012, these funds buyback undervalued stocks once the new-year begins. I don’t know why this occurs, but it does, and Apple is way too strong to remain this cheap.

Conclusion

Regardless if you agree with the outlooks and opinions I provide, these are both fundamentally cheap stocks to monitor over the next year. Chances are, you have an opinion regarding both stocks, as they are two of the most controversial in the market. Yet because of the valuation being presented and the overwhelming presence of pessimism I believe both are “buys,” and are worth your due diligence. 


BrianNichols owns shares of Apple. The Motley Fool owns shares of Apple and Best Buy. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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