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5 Stocks To Buy On Weakness
The old adage, "sell in May and go away," was right on the mark through the first week of the month. The Dow suffered its biggest drop ever during the first five trading days of May and many individual stocks got crushed. The selling is viewed in two ways, either a buying opportunity or the start of a correction that has a long time coming. (Before diving into the rest of the article, you may want to check out To Sell Or Not To Sell.)
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I happen to believe the former is the more likely event and that investors must start searching for stocks to buy on weakness. When a dramatic sell-off occurs as it did during the first week in May it often hits the market leaders the worst. And therefore, I have identified five market leaders based on fundamentals and technicals that can be considered buying opportunities.
Discount Fashion
G-III Apparel Group (Nasdaq:GIII), manufacturer of men's and women's apparel, is trading at a major discount to its earnings and growth estimates. This little-known apparel/textile company is one of the best value plays in the market. In the most recent earnings report (fiscal fourth quarter) G-III reported EPS of 40 cents, excluding one-time items on revenue of $193.8 million. Revenue was up 14% from one year earlier and blew away Wall Street expectations. For the fiscal year the company earned an adjusted profit of $1.74 putting the current P/E ratio at 16.6 based on the trailing 12 months. Next year's EPS are expected to jump to $2.17, and $2.42 the following year. Based on next year's earnings estimate with a relatively low growth number, the stock has a fair value of $43 per share according to our model. (For more, see The Value Investor's Handbook.)
Low-Priced Tech
When people think of Apple (Nasdaq:AAPL) they think: iPod, iPad, iMac and iPhone. Enough said. If that is not enough reason to buy AAPL on pullback, look at the fundamentals. In 2010 the company is predicted to make $13.32 per share with earnings increasing to $15.33 in 2011 and a whopping $17.55 in 2012. Based on a price per share of $254, the stock is trading with a P/E ratio of 19 when using the 2010 earnings estimates. Jumping ahead to 2011 and the P/E ratio falls to 16.6. I feel AAPL should be trading closer to a P/E ratio of 25, generating a target price of $328.50. The price target jumps to $379 in 2011.
VMWare (NYSE:VMW) is a technology name that has ties to virtualization and cloud computing. This stock is not as attractive as some of the other ideas, but it's well positioned in a sector that could be the next big technology boom. Revenue increased by 35% during the last quarter with a 50% increase in the maintenance and services industry. VMW is a high risk, high reward play that will benefit from continued outperformance of the technology sector.
Growth Opportunities
New Oriental Education and Technology Corp (NYSE:EDU) is a Chinese education company with growth estimated above 30% in the next two years. Trading at a P/E ratio of 30 makes this growth stock a value play at current prices. There is also the angle of the underlying business of the company - educating the massive Chinese population. As the middle class grows there will be an increased enrollment in higher education schooling. During the last quarter the company saw enrollment increase by 18% to 416,000 people.
High-end retailer Nordstrom (NYSE:JWN) was one of the small number of retailers to report solid same-store sales in the month of April. The Seattle-based chain reported a sales increase of 7.5% in April, but the market-wide selling kept the stock from continuing its run higher. Even more impressive than April was the 16.7% sales increase for all stores during the first quarter and 12% increase for stores open at least a year. Earnings are expected to come in at $1.94 in 2010 and jump to $2.62 in 2011. The consistent growth projected in the coming years combined with a pullback to the high $30s makes JWN an attractive buying opportunity.
Bottom Line
The pullback that occurred on the crazy day in May will not be the last pullback and investors should have their list of stocks ready for the next time. The five above should be a good starting point.
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I happen to believe the former is the more likely event and that investors must start searching for stocks to buy on weakness. When a dramatic sell-off occurs as it did during the first week in May it often hits the market leaders the worst. And therefore, I have identified five market leaders based on fundamentals and technicals that can be considered buying opportunities.
Discount Fashion
G-III Apparel Group (Nasdaq:GIII), manufacturer of men's and women's apparel, is trading at a major discount to its earnings and growth estimates. This little-known apparel/textile company is one of the best value plays in the market. In the most recent earnings report (fiscal fourth quarter) G-III reported EPS of 40 cents, excluding one-time items on revenue of $193.8 million. Revenue was up 14% from one year earlier and blew away Wall Street expectations. For the fiscal year the company earned an adjusted profit of $1.74 putting the current P/E ratio at 16.6 based on the trailing 12 months. Next year's EPS are expected to jump to $2.17, and $2.42 the following year. Based on next year's earnings estimate with a relatively low growth number, the stock has a fair value of $43 per share according to our model. (For more, see The Value Investor's Handbook.)
Low-Priced Tech
When people think of Apple (Nasdaq:AAPL) they think: iPod, iPad, iMac and iPhone. Enough said. If that is not enough reason to buy AAPL on pullback, look at the fundamentals. In 2010 the company is predicted to make $13.32 per share with earnings increasing to $15.33 in 2011 and a whopping $17.55 in 2012. Based on a price per share of $254, the stock is trading with a P/E ratio of 19 when using the 2010 earnings estimates. Jumping ahead to 2011 and the P/E ratio falls to 16.6. I feel AAPL should be trading closer to a P/E ratio of 25, generating a target price of $328.50. The price target jumps to $379 in 2011.
Growth Opportunities
New Oriental Education and Technology Corp (NYSE:EDU) is a Chinese education company with growth estimated above 30% in the next two years. Trading at a P/E ratio of 30 makes this growth stock a value play at current prices. There is also the angle of the underlying business of the company - educating the massive Chinese population. As the middle class grows there will be an increased enrollment in higher education schooling. During the last quarter the company saw enrollment increase by 18% to 416,000 people.
High-end retailer Nordstrom (NYSE:JWN) was one of the small number of retailers to report solid same-store sales in the month of April. The Seattle-based chain reported a sales increase of 7.5% in April, but the market-wide selling kept the stock from continuing its run higher. Even more impressive than April was the 16.7% sales increase for all stores during the first quarter and 12% increase for stores open at least a year. Earnings are expected to come in at $1.94 in 2010 and jump to $2.62 in 2011. The consistent growth projected in the coming years combined with a pullback to the high $30s makes JWN an attractive buying opportunity.
Bottom Line
The pullback that occurred on the crazy day in May will not be the last pullback and investors should have their list of stocks ready for the next time. The five above should be a good starting point.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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