Who says that volatility is all bad? The stock market that stumbled through summer and is having a fitful autumn can be a bearer of bargains. Market troughs present fire sale prices for gems that are likely to richly reward investors in the future.
So instead of fretting about the potential for an extended rocky stock market ride, be patient, and pounce when the prices are right. We asked some pros to weigh in on which companies you might want to put on your bargain-basement wish list.
1. Bank of America (BAC)
Currently trading at around $7, Tom Villalta, lead portfolio manger of the Jones Villalta Opportunity Fund (JVOFX) would snap it up now and until it hits $10 per share.
"One does not prosper by buying high and selling low, but by buying low and selling high. BAC is presently contending with a number of uncertainties that have driven the company's valuation to unreasonable levels. With a P/E ratio of just over 5 times forward earnings and a [price-to-book] ratio of 0.31, it is difficult not to conclude that BAC is suffering from an inordinate amount of pessimism," says Villalta.
"Given investors experience with financials over the past few years, it would be easy to view this company through the prism of the 2008-2009 financial crisis and conclude that uncertainties in Europe will force the company into equally as dire straits. We don't think this is likely," he says.
Given the company's liquidity position, and the various asset sales that have been taking place and continue to take place, he believes BAC will have no problem in maintaining regulatory capital requirements, and will be well positioned to prosper as uncertainties are resolved over the next 12 to 18 months.
BAC does not need an earnings growth "story" to be a very appealing stock, he says. With a such a low P/B ratio, BAC simply needs a return to normalcy in financial markets and an operating environment that isn't besieged by uncertainties. While the present environment is challenging, Villalta believes that those who are extrapolating it into a longer-term scenario are in error, and their mistake presents a buying opportunity.
Hey, it was good enough for Warren Buffet.
2. Hewlett-Packard (HPQ)
Villalta also is sweet on HP -- despite the game of CEO musical chairs it's playing. It's trading around $25, and Villalta feels it's a real deal even as high as $28 per share.
"HP is a market leader in many of its business segments and generates tremendous free cash flow," says Villalta. "While the company is currently contending with management turnover and a perceived lack of strategic direction, we are more inclined to view this large-cap behemoth as having a certain amount of inertia that will allow the company to continue to prosper in spite of turnover at the top."
"HP's market price implies an expectation of free cash flow contraction of in excess of an annualized rate of 2% per year over the next few years. In our view this is highly improbable, especially given that the company has grown its cash flow from operations from just over $8 billion in 2005 to almost $12 billion in 2010. Given a modicum of stability in management, we feel this issue could provide significant upside, and move to a price that exceeds $40 per share in the near-term," he says.
3. ExxonMobil (XOM)
While currently trading at about $74, if it drops to about $68, Jeff Sica, president and chief investment officer of SICA Wealth Management would call it a "must buy." It's a darling quite simply, he says, because it's a company that meets basic demand needs, not a company dependent on a strong economy.
4. 3M Company (MMM)
3M is going for about $78. Sica, however, says his dream number is $70, and he's patiently waiting to see if it gets there. "I like this stock because it has a reasonable valuation related to the current stock prices. It is a diversified business, with a focus on basic consumer needs. It also has an attractive dividend."
Similarly, with DuPont at roughly $43, Sica will have to wait for his target price of $35. But he's big on DuPont, he says, "because they are focused on agriculture which increases the output of farmland for a hungry world. It has diversified business' focused on raw materials, and the 3.83 Div yield."
6. Core-Mark Holding Company (CORE)
Right now it's trading at about $32. But take a second look when it hits $30, says Matt Swaim, managing director of Advisory Research. "At $30 a share, the company trades below the liquidation value of its inventory, but in fact is poised to grow as the restructuring actions over the past five years are just beginning to take hold in an industry that is increasingly looking for profit help by consolidating distribution," says Swaim. Core-Mark, which distributes consumer packaged goods and store supplies to convenience stores, emerged from restructuring in 2005 and has since consolidated operations and expanded geographically.
7. GATX Corp. (GMT)
It's shares are trading at about $34 now, but the day it drops to $29, make a move, says Swaim. "The rail leasing company works with the highest credit quality lessees' due to the complexity of its cars, its integrated services capability, and the strength of its financial position."
GATX added over 18,000 cars by investing over $1 billion in distressed assets from 2008 to 2010, he says.
"The company is poised to better utilize these assets, and supports an attractive dividend policy due to the annuity of its business. At $29 a share, the stock supports a 4%-plus dividend and trades at material discount to the liquidation value of its owned asset rail fleet," says Swaim.
8. Walmart (WMT)
Surely the Big Daddy of Retail has had its woes, but it still looks good to Swaim. "Walmart has gone through the painful process of growing into its earnings multiple over the past decade. The stock now trades at a low earnings multiple, is gaining some traction on its ability to reconnect with a strained consumer, and is aggressively returning cash to shareholders. In fact, at the current quote, Walmart's 10-year bond is yielding less than the company's equity dividend yield. The dividend is expected to grow over the next 5 years at a rate greater than 10%," says Swaim. Right now it's trading at around $52, his buy target.
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