Oversold Stocks Primed To Pop

By Investopedia | March 25, 2010 AAA

The underlying tenet behind value investing is the idea of value itself. What determines whether a stock is considered undervalued or overvalued differs from valuation to valuation, but the belief that almost any stock can be defined as a "value" at some point in time is almost universally accepted. One method of finding undervalued shares is to seek out stocks that have lost considerable value over a relatively short time period and may have been oversold in the process .

With this in mind, I'd like to discuss a few companies whose shares appear to have dropped to far and may be ready to recover some of the losses they have incurred.

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Hot Stuff
Firstly we have teen retailer Hot Topic (Nasdaq:HOTT). The specialty retailer deals in licensed pop-culture apparel and accessories has had a brutal 11-month stretch, with shares tumbling 50% over that period. The company's earnings took a beating in 2009, as highlighted by a 5.1% dip in same-store sales, 3.2% loss in earnings and a whopping 40% decrease in net income from fiscal 2008. Fourth quarter results echoed the firm's annual numbers, with a 10% loss in revenue and a 44% decrease in earnings.

As the losses piled up and the stock price fell, competitors like The Gap (NYSE:GPS), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (Nasdaq:URBN) all surged by more than 55% in the past 11 months. This comes after HOTT shares powered past these same competitors in the first quarter of 2009, up 56% through mid April, 2009; The leader became the laggard. Taking a closer look however, there's reason to believe that shares have been oversold and a reversal might be in order.

While earnings have been an obvious disappointment for Hot Topic, the company has met or exceeded expectations in each quarter in 2009. Also, management's first quarter guidance of a 2 to 5 cent loss was inline with analyst expectations as well. The stock's beat down then seems a tad unwarranted, since those earnings expectations and the company's guidance should already have been priced into the stock. This all points to a classic oversell, and appears as though the smart money has started to take notice. HOTT shares are up 20% since mid February, outpacing both URBN and GPS. Abercrombie & Fitch has surged 37% over the same period, following a fourth quarter earnings beat on the heels of a downgrade from Eric Beder of Brean, Murray, Carret & Co. Hot Topic's recent run may have eaten away some of the value that was present in mid February, but with the retail sector performing well at the moment Hot Topic still could have some room to run.

Look Before You Leap
Another company that fits the part is Leap Wireless (Nasdaq:LEAP), which has dropped 55% in the past year and 3% since the new year. The wireless carrier, which offers its services under the Cricket brand name has struggled mightily with big losses in earnings and shrinking revenues in the ultra-competitive wireless communications industry. The company has missed expectations in each of the last four quarters by double digits, leading to traders punishing the stock. Leap's biggest issue has been their lack of a smartphone offering under its Cricket brand, opting to stick with low-cost handhelds and pre-paid wireless options. The trend has been however towards smartphones, as can be plainly seen by the success of Apple's (Nasdaq:AAPL) iPhone and Research In Motion's (Nasdaq:RIMM) Blackberry product line, currently offered by national competitors such as AT&T (NYSE:T) and Verizon (NYSE:VZ).

Leap does have a few promising items on the horizon however. The firm recently announced that it will be expanding its Cricket service to all 50 states, making it a true national carrier. They also announced that they will be adding the new Kyocera (NYSE:KYO) Android smartphone along with a Blackberry smartphone in the coming months. Add to this the impending merger with MetroPCS (NYSE:PCS) and 2010 could be a comeback year for Leap. Shares have already begun to reverse their course, rebounding 20% since the end of February. Although the company is expected to lose somewhere between 60 and 65 cents this quarter, the upside for Leap shares still looks promising.

Fuel in the Tank
Lastly we venture into the automotive sector and take a look at Fuel Systems Solutions (Nasdaq:FSYS). Fuel Systems Solutions is involved in the creation of alternative fuel cell components for automobiles and industrial clients. Their components primarily deal with controlling the pressure and flow of alternative gases such as propane and natural gas; That's right, I said natural gas. If the price of natural gas remains low - which I see no reason for it not to, considering the excess supply and the current shale boom - FSYS fuel system components could become a hot commodity. Not to mention that it operates in an industry that is expected to grow substantially in the next few years as automakers aim to build more fuel efficient vehicles in hopes of capturing market share in the highly fractured automotive industry.

The fundamentals paint a promising picture for Fuel Systems, as it trades at a very low P/E of 10.7 and can currently be purchased for only 85% of sales. The company's balance sheet is also great, with the firm currently holding over $2.60 per share and a current ratio of 2. The company's stock has been on a proverbial roller coaster ride in the past year and a half, going from over $55 in the summer of 2008, down to $10.50 in April '09, back up to $50 in late 2009 and early this year and now back down to around $32. Shares are down 36% since mid January, on no truly bad or sgnificant news. In fact, FSYS actually had a fourth quarter beat in early March, which has led to a 13% bump in the stock. This stock was definitely oversold going into earnings and, while shares have rallied, it is still trading well below its $50 resistance from this past winter.

Bottom Line
These are just a few stocks that have been oversold in recent months and look to be possible value plays for interested investors. Do your homework and review their earnings potential. As always, it's your call. (For more from this contributor, check out 4 Oil & Gas Companies With Momentum And Great Dividends.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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