3 sleeper stocks at bargain prices

The rally has overlooked these promising shares.

By InvestorPlace Mar 28, 2012 9:10AM

Image: Woman asleep (© Tom Grill/Corbis)By Jeff Reeves

 

There's a lot of "froth" in the market right now as investor optimism gets in full swing and the bull market seems to gain momentum. The S&P 500 is up about 20% since Thanksgiving, and many highflying blue chips have dramatically outperformed that mark. Apple (AAPL) is up 65% in the past four months, and Bank of America (BAC) is up about 85% in the same period.

 

You have to wonder how long this run can last. Sure, it's encouraging to see the market hitting new highs, but you have to worry about buying a top. After all, the idea of investing is to buy low and sell high. It's very difficult when many stocks are bid up to their highest prices since before Lehman Bros. went under in 2008.

 

If you want to participate in the rally but fear some stocks are overbought, don't worry. A handful of bargains are still out there. These picks have been lagging the market considerably, and while they may not be perfect investments, they are incredibly attractive at their current pricing.

 

Here are three big bargains to snatch up amid the red-hot rally:

 

Goodyear. Yes, that Goodyear (GT). Admittedly, this stock has some problems. Rubber is petroleum-based, and high crude oil hurts input costs. The company continues to struggle while streamlining operations, recording yet another $23 million in restructuring charges for its fiscal fourth quarter as the latest chapter in an effort to "right size" the business.

 

But take an honest look at Goodyear, and it's hard to argue that this company isn't on the verge of a rebound.

 

After bleeding cash due to the slowdown in the auto market and the impact of the recession, Goodyear finally returned to profitability last year. What's more, it's forecasting significant growth in 2012 -- with projected earnings per share of $1.85, a nearly 50% surge over fiscal 2011! Revenue is back above 2008 levels to boot after a 20% expansion last year.

 

What's more, the strong growth in the auto sector is starting to show up big-time in the data. Consider that in 2012 auto exports and auto imports soared at the beginning of the year, proving that China's booming vehicle market and recovering demand in North America are providing great opportunities for investors.

 

So how can it be that amid all this good news, Goodyear is actually down 15% year-to-date? How can it be that despite huge earnings growth in the pipeline, the price-to-earnings ratio based on fiscal 2012 numbers is less than 7?


Sounds like a bargain to me. Goodyear has been flat for a year, but it could be quite a turnaround story 12 or 24 months from now. 

 

Southwest. Nobody likes airline stocks. Costly government regulations, the impact of creeping crude oil prices on jet fuel costs and other issues make this industry a difficult one to succeed in. The fact that American Airlines just declared Chapter 11 -- the latest in a long line of traditional "hub and spoke" carriers that went belly up in the last decade -- is all the proof you need.

 

But don't count out Southwest (LUV) just because of its troubled sector and its ailing rivals. The fact is this carrier has always been the industry leader when it comes to profitability and customer satisfaction, and now may be a good time to get in at a good price.

 

Why? Because Southwest had an off year in 2011. A significant quarterly loss in its fiscal third quarter really weighed on earnings. The result was a harsh sell-off of around 35% that sent LUV stock to the $8 range in late 2011 -- levels not seen since late 2009. The stock hasn't recovered since.

 

Consider, though, that fiscal 2009 earnings were just 13 cents a share on $10.3 billion in revenue -- and fiscal 2011 earnings were 23 cents a share on $15.6 billion in revenue. Looking ahead, 2012 earnings could tally over 67 cents a share on $17.5 billion in revenue!

 

When you throw in the fact that Southwest is upgrading its fleet by taking delivery of 33 new Boeing (BA) 737-800 planes this year, things get even more bullish. Not only are these planes more fuel-efficient, they can carry an additional 38 passengers.

 

Yes, airlines are always risky stocks because they operate in such a difficult environment. But if you're afraid of buying into the irrational exuberance of the tech or financials rally, consider this bargain play.

 

Corning. On Jan. 25, I wrote a column for MarketWatch declaring that Corning (GLW) was a great bargain after a post-earnings sell-off. If you bought then, you'd be sitting on a nice 13% gain in about two months' time.

 

After further analysis, I remain convinced that Corning remains a great investment and that those gains are only the beginning of momentum we may see from this stock.

 

For starters, let's recap some recent difficulties, including waning demand for its patented Gorilla Glass, a mainstay of smartphone displays. That, coupled with price declines for LCD displays, caused a significant drop in 2011 profits and ate into its 2012 outlook. Also, Corning also previously warned that its fiscal first-quarter earnings could fall anywhere from 5% to 20% based on low prices and weaker demand. That could be a real pain for shareholders if the worst-case scenario plays out.

 

However, long-term investors should look past this recent trouble and to the future. Corning has a revamped Gorilla Glass 2.0 just unveiled at the Consumer Electronics Show early this year, and the booming tablet and smartphone market means there's a good chance sales will pick back up for GLW.

 

Its LCD panel business, while weak, is also a good long-term play and represents 40% of 2011 sales. Let's not be naïve and think that the world will revert to those old tube-based TVs and computer monitors anytime soon, even if consumer spending isn't all its cracked up to be.

 

Another high-tech angle is Corning's fiber optic cable business for telecom use, representing over 25% of 2011 sales. While wireless technology is great, any company that uses physical cables is learning the importance of evolving beyond typical connections and into faster-speed lines such as fiber optics. This is a good growth business as digital demands continue to stress existing networks for all kind of corporations.

 

And if you calculate valuation based on full-year 2012 earnings of $1.60, you get an attractive price-to-earnings ratio of less than 9 at current pricing. This is after revenue has increased year-over-year sequentially since 2009, and quarter-over-quarter for nine periods in a row.

 

I'm not saying Corning will reclaim its 2011 peak of $23 a share. But if it just gets into the $20 range, you could be sitting on 40% to 50% returns in a year or two. And based on earnings of $1.60, a share price of $20 would give you a very reasonable price-to-earnings ratio of 12.5 -- a distinct possibility.

 

Jeff Reeves is the editor of InvestorPlace.com, and author of "The Frugal Investor's Guide to Buying Great Stocks." Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks. 

 

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