Will Either of These $1.40 Stocks Reach $2.00?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When you think of a stock that trades at $1.40 you consider it to be a small or micro-cap company, not a company with revenue in the multi-billions. These are stocks that might not even show up on your screener, but two in particular are rising fast and are potentially poised to trade even higher. With that being said, I am looking at Rite Aid (NYSE: RAD) and Alcatel-Lucent (NYSE: ALU) to determine which might see $2.00 first.
In a previous article, I compared both Alcatel-Lucent and Rite Aid to their competitors to show the pure size of each business with the level of value that is being presented. Rite Aid, with a market cap of $1.25 billion, and Alcatel-Lucent, with a market cap of $3.15 billion, might be two of the cheapest and most promising stocks in the market. However, both present significant risk and have faced turmoil over the last few years, which has led to market leading loss, and now market leading value.
The key moving forward for each company is to continue moving forward in their restructuring and organizational changes. Rite Aid posted its first profit in several years and improved its outlook for 2013. Alcatel-Lucent completed its near $2 billion financing deal that will provide the company the leverage to now downsize and sell its non-profitable businesses while maximizing on its growing and profitable segments. Therefore, both companies appear to be moving in the right direction.
The question now becomes which of these two stocks present the most upside. Both stocks have rallied a near 40% since trading at $1.00 just a few short weeks prior. But like I said, we are looking for upside now. Therefore, we can’t necessarily discuss industry margins, trading metrics, or other long-term factors. We must look at immediate catalysts.
Rite Aid’s Upside Potential Lies in Speculation and Analysis
In terms of a long-term investment, if Rite Aid could ever achieve a profit margin of just 1.5% then it could see a market cap nine-fold its current valuation. However, the key metric that investors will be analyzing for the immediate future is its turnaround, and how significant this turnaround might be.
Over the next couple months anticipate analysts and other strong opinions regarding this company as we dissect the likelihood of this turnaround. The $60.5 million quarterly profit came as a huge surprise, as the market expected a loss of about $20 million. However, we will ask: Are the generic drug offerings sustainable? Will the company continue to close underperforming stores? And will it continue to develop and improve its loyalty program?
These are the immediate questions that will determine its short-term trend. If analysis proves to be bullish for the company then RAD will be upgraded, bought by more institutions, and will continue to post quarterly surprises on its trend higher.
Alcatel-Lucent’s Upside Lies in Organizational Changes
So what does Alcatel-Lucent have to do to trade higher short-term and make it to the $2.00 price? You can read my long-term outlook by clicking here (which includes Rite Aid), but short-term catalysts vary. At this time, the key for Alcatel-Lucent is its restructuring program, and its actions with the near $2 billion it received in financing.
Alcatel-Lucent’s restructuring program is going to be long and excessive, but its immediate moves to improve its future will be closely watched. The company has the potential to make a huge splash in the coming months, maybe weeks, and it now has the money to monetize the parts of its business that are no longer profitable or that can be improved. In the past, Alcatel has not had the money to invest in such company changing decisions, and now with the value of its assets it is very likely that Alcatel-Lucent could be abruptly changed for the better.
Only days after the company completed its financing deal with Goldman Sachs, there were rumors that it was in talks to sell its undersea cable-laying unit for about $150 million. This is a good example of the opportunity being presented for Alcatel. A lot of people don’t understand the size of this company because of its market cap. However, it has patents that are reportedly worth more than double its market capitalization. Then, when you consider that the company stretches into 130 countries with various operations, you can see that there are many opportunities to capitalize on several $100-$200 million deals that will also eliminate operational loss from its income statement.
So Can Either Reach $2.00, Soon?
Alcatel and Rite Aid are both at different stages of development and change: Rite Aid is now beginning to see the effects of its turnaround yet Alcatel is just starting its turnaround. However, Rite Aid’s turnaround has not been as flashy; meanwhile Alcatel operates in an industry with significant demand and interest.
Rite Aid was simply pushed too low before it announced earnings. The company is seeing significant fundamental improvements, and therefore I think it will make a trend higher in the coming months. The stock is worth about $3.00, and with its improvements I think it could reach $2.00 very soon. Alcatel, on the other hand, is going to be driven by big deals and its restructuring program, a program that investors have wanted for years. Therefore, I think it also trades higher, and will quickly exceed $2.00. The bottom line: Both stocks were massively undervalued compared to their worth and now, with fundamental changes, they are each poised to trade considerably higher.
BrianNichols is long RAD and ALU. The Motley Fool has no positions in the stocks mentioned above. 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!