4 Undervalued Stocks to Watch
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The investing world is full of surprises. One day a stock is down 20% on an earnings conference call, the next day the stock is up 30% on news of a new contract agreement. While the average investor would look at all of this volatility as risk, an opportunist should use volatility as a time to buy. In fact, in these markets, there are five companies in particular that I see real opportunity in.
Growth Opportunities Abound
Sure, it is a troubling market in Europe, and yes, the worldwide economy is in a state of deleveraging. Everything just looks bleak, doesn't it? Cheer up! Growth isn't gone just yet!
One of my personal favorite places to buy growth right now is in the Solid State industry. Despite growing dramatically in the last few years, the industry has been hit hard recently as many solid state drive stocks are down heavily in the last three months. As these stocks begin to rebound, this may be an industry to look out for. OCZ Technology Group ) in particular has been rebounding after a horrific quarter. After going from highs of $9.40 to lows of $4.14 in the last six months, OCZ Technology is rebounding again, and is up 22% in the last month. OCZ's acquisition of a major controller company, Indilinx, has made it a powerful figure in the solid state industry. I believe that as the solid state industry consolidates, OCZ Technology Group's value should allow it to either become a industry giant or be acquired by a larger competitor. Either option should work out pretty well for shareholders.
Based on peer valuations based on revenue and revenue growth, I think OCZ Technology should be worth around $10 per share. In any case, an upcoming conference call after the market closes on Tuesday should provide a major catalyst, upwards or downwards, for the stock price. For further information on the potential thesis for investing in OCZ Technology Group, feel free to read my prior blog post on the opportunity.
Looking for Income? Hidden Yields Abound
While growth stocks and growth industries provide tremendous upside, they have their risks. The upcoming conference call by OCZ might be a bit too risky for even the opportunist investor, but don't worry! There are plenty of income opportunities still available. The simplest income opportunity I could find is in Sandridge Mississippian Trust II ). I also wrote a blog post highlighting this opportunity, and I think the potential gets better and better as prices fall.
Essentially this is a royalty trust that will pay dividends every quarter from income it gets by selling oil from its wells. Thanks to its oil hedges, the changes in oil prices shouldn't have a significant value on this investment. The real value comes from the rising dividend, which is set to become a 13.6% yield in 2013 and only increase from there until 2017.
Aside from the dividends, I expect that the price will increase to reflect Sandridge's value in their relationships to a bond rather than a stock as its dividends are so predictable, and this should cause an eventual significant price appreciation in the stock.
Another less certain idea is a stock owned by billionaire hedge fund manager, Leon Cooperman. This company, KKR Financial Holdings ), is currently involved in investing in corporate debt and other areas of investment. I believe they have a superb management team, and they are a sure bet if economic prospects rise. Even in the event that the current situation continues, KKR Financial Holdings should provide a great margin of safety to fall back on for investors as it sells for 0.9x book value and has a 8.25% dividend, which is likely to grow in the future. While I have no blog post analysis for you to see here, I think this is a great place for investors to do their own research and I personally own the stock.
The Turnaround Story
Finally, if you're looking for a management team that you can trust and a quality name, unlike KKR Financial Holdings and Sandridge Mississippian Trust II, and a solid industry position with significantly less risk than OCZ's precarious solid state competition, Aflac Inc ) is the place to go. With a solid dividend yield of 3% and rising earnings (forward P/E is expected to be 6.2), Aflac should be ready to catapult forward in the next two years. After being assaulted by fears of the Japanese earthquake and Eurozone debt crisis, Aflac has clarified that losses in Japan were minimal and have ceased (Japan was a high growth area in the recent quarter) and Eurozone debt losses have been minimized and are a one-time occurrence as Aflac has derisked their bond portfolio. Their recent quarter went very nicely and I expect TTM earnings after this quarter to be around $6 per share, which should cause a nice boost in Aflac's share price. In any case, Aflac is a dividend aristocrat, and at these prices it's definitely something worth looking into.
If nothing else, these four stocks offer a lot of potential for further research. In volatile markets, opportunity emerges, so I hope you take advantage.
shamapant owns shares of Aflac, KKR Financial Holdings LLC, and OCZ Technology Group. The Motley Fool owns shares of SANDRIDGE MISSISSIPPIAN TR II COM. Motley Fool newsletter services recommend Aflac. 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.