3 Diversified Stocks for Your Speculative Portfolio
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently the market has been more than generous, discounting great names like Research In Motion (NASDAQ: BBRY) and First Solar (NASDAQ: FSLR) to their 52 week lows. My last article “Sell In May And Go Away” came off a bit pessimistic, therefore I wanted to zoom in on a few stocks that offer bullish opportunities now, if one doesn't believe in the month of May. There are always pockets of bullishness in some sectors, and one of the best ways to get ahead is to look for names that have already come down on their own before the sluggish market sentiment hit the Street. These names have been battered for quite some time now, the one year chart below shows the mayhem that ensued in the last 12 months. Following are three stocks that are oversold and can offer solid opportunities for the remainder of the year. In sequential order, the stocks mentioned first are expected to recover sooner.
#1 - Bank of America (NYSE: BAC) $8.00
Price/Book: 0.41
PEG: 0.81
2012 Operational EPS est.: $0.64
Yield: 0.48%
S&P Credit Rating: A-
Risk: Medium
Bank of America is the 2nd largest US financial holding company with total assets of $2.13 trillion. As of January 2012 its total deposits amount to $1.033 trillion and loans estimated at $926.2 billion. It accounted for 11% of all U.S. Deposits in 2011. Although still struggling from debit valuation adjustments and litigation costs, Bank of America has been shoring up its balance sheet by selling its China Construction Bank assets for $8.3 billion and planning to retire subordinated debt as well as preferred stock in the next quarters. While I think revenue growth will remain lackluster for the remainder of the year, the company is still discounted nearly 60% by a price to book valuation. With my conservative estimates, the stock should gain no more than $1.50 by the end of the year, or 18.7% from its current levels.
#2 - Netflix (NASDAQ: NFLX) $75.97
Price/Book: 6.35
PEG: 9.71
2012 Operational EPS est.: ($0.09)
Yield: N/A
S&P Credit Rating: BB-
Risk: High
Netflix is the hot topic on the Street, since the majority of short sellers are biting their fingernails, waiting for the company to go extinct due to Apple, Hulu.com and Facebook entering the movie streaming business. In 2011, when CEO Reed Hastings separated the DVDs by mail and streaming content from its original “hybrid” plan, it resulted in millions of subscriber cancellations. A large percentage of those subscribers have returned in three months after not finding a competitor that matched its content variety and quality. This was after the company had posted a three year CAGR of 33% in sales from 2008 to 2011 largely due to growth in international markets. It has also improved its return on invested capital (ROIC) from 12.7% in 2007 to currently 30.7%. With my quantitative DCF valuation, Netflix is a $100 stock and the recent sell off below $80 is overdone in my opinion. Since this is a business that is highly competitive, my outlook is deemed accurate in the near term, not next year. It is exhilarating to see how the content streaming landscape will change after 2013 when competitive Apple decides to spend more on content providers.
#3 - British Petroleum (NYSE: BP) $42.02
Price/Book: 1.20
PEG: 1.27
2012 Operational EPS est.: $8.04
Yield: 4.41%
S&P Credit Rating: A
Risk: Medium
London based British Petroleum is financially and operationally sound. Remember the three "D"s of investing: death, divorce, and disaster offer the best discounts, consequentially the highest yields in stocks and real estate. The Gulf Spill was a perfect opportunity to begin the incremental buying on the oil giant. The company aims for its upstream production growth of 1% or $1.5 million barrels per day by 2015. It is also expected to increase its liquefied natural gas production by 10% in 2013, meanwhile fighting its cost increases, which are relatively below the historical inflation rates of its industry peers.
Gulf of Mexico legal claims should continue putting downwards pressure on the price per share for quite some time, hence the stock remains to be one of the riskiest large cap names to own in the energy sector. However, it still trades below my DCF valuation estimate of $53.50 by 26%. The company is currently modernizing 50% of its U.S. downstream assets and sells the rest with a planned $45 billion sale for the rest of the year. In addition, the Gulf of Mexico legal claims are also expected to conclude at the end of this year. At these levels, it makes sense to add the oil giant to your portfolio right before the summer driving season.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Bank of America. Motley Fool newsletter services recommend Apple, First Solar, and Netflix. 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. If you have questions about this post or the Fool’s blog network, click here for information.
