While it may feel as if the stock market is in a deep slump, the S&P 500 is still within 10% of its all-time high. Perhaps the market environment feels so lousy because many individual stocks are now trading far below their 52-week highs. In fact, more than a quarter of all stocks in the S&P 500 have fallen more than 30% from their peak. And fully 96 of the companies in the index are now trading more than 40% below the 52-week high.
I've spent the last week researching this group of laggards. Many -- if not most -- of them may stay stuck in a rut for some time to come, thanks to growth headwinds of still-rich valuations. Yet a handful of these losing stocks are clearly oversold, and poised for a sharp rebound in coming quarters. These are the three best opportunities I've found.
Kohl's (NYSE: KSS)
Earlier this year, shares of this department store retailer were surging as management laid out plans to pursue more bold fashions for the back-to-school and holiday seasons. A period of subsequent tepid quarters have quashed investor enthusiasm, leading shares to fall sharply.
To be sure, fiscal (January) 2016 will turn out to be a transitional year, as per share profits are likely to barely budge from fiscal 2015 levels. While management will need to deliver more impressive results in coming quarters, they should be aided by an increasingly perkier retail spending environment. Employment trends continue to strengthen, and cheap gasoline is putting more cash in consumer's pockets. That sets the stage for a solid holiday spending season, which should aid all retailers.
Kohl's holds especially strong appeal among retail stocks, simply because its shares are so cheap. Shares trade for around 10 times projected (January) 2017 consensus EPS forecasts. More importantly, Kohl's is on track to generate more than $1 billion in free cash flow next year, equating to a free cash flow yield in excess of 10%. This stock already sports a solid 3.7% dividend yield, and the cash flow strength suggests that a large share buyback plan may also soon be in the cards.
Applied Materials (Nasdaq: AMAT)
It's been a very challenging year for the world's largest semiconductor equipment manufacturer. A bold move to acquire rival Tokyo Electron was denied by regulators. The move would have, arguably, given AMAT too much market share leverage in an industry where consolidation has already greatly reduced competition in recent years.
While the deal would have helped give AMAT an even more robust profit profile, the company is still in very strong shape on a standalone basis. More importantly, the terminated transaction has forced management to seek other ways to enhance shareholder value, starting with an aggressive slate of cost cuts. And while the company is trimming the fat, it also aims to buy back roughly 10% of shares outstanding. The net payoff: around $2 a share in EPS by 2018, assuming a mid-range industry revenue scenario of $33.5 billion.
The chip equipment industry isn't expected to show much growth this year, but recent comments from memory chip makers Micron Technology (Nasdaq: MU) and SK Hynix suggest that industry revenues should begin rising late this year and continue rising into 2016. Analysts at Merrill Lynch, who have a $23 price target for AMAT, note that "Since a large part of the memory spending will be related to deposition and etch technologies, it should benefit AMAT and Lam Research (Nasdaq: LRCX)".
Shares are currently trading at around $15, roughly 40% off of their 52-week high, and are valued at less than eight times the 2018 EPS management's guidance. Merrill Lynch's price target suggests more than a 50% upside.
Qualcomm (Nasdaq: QCOM)
StreetAuthority's Dave Forest, Chief Investment Strategist of the premium advisory Top 10 Stocks, spends a great deal of time focusing on innovation. He has even issued several special reports on the topic, which are available to subscribers of his newsletter. In the December 2014 issue of Top 10 Stocks, explained why he spends so much time researching such companies: "These are the firms that are pushing the limits of their industry and inventing entirely new businesses -- the kind that are hyper-profitable."
And Dave has consistently praised the innovation engine at chip firm Qualcomm. He notes that the company spends an astonishing 21% of revenue on research & development (R&D). That has helped Qualcomm to build a powerful base of intellectual property, which has already helped the firm garner massive licensing fees. And current R&D efforts should help Qualcomm to retain its status as one of America's most patent-rich firms.
Meanwhile, shares are out currently out of favor, thanks to a set of recent subpar quarters. Yet this company has history of quickly bouncing back, and as technology and telecommunications advances in coming years, Qualcomm should again be at the vanguard. Shares have fallen from the 52-week high of $79 to a recent $54, though Dave Forest sees shares more than doubling to his $118 price target.
Risks To Consider: The current year has been a challenging one for each of these three companies, and investors should brace for one or two more tepid quarters, as revenue upturns often take a little while to take root.
Action To Take: Even as profit growth has recently been subpar for these stocks, their shares are now trading at extremely inexpensive levels. They possess strong track records, and retain solid industry positioning, and the smart money will flock right back to them as soon as the current growth lull ends.
Editor's Note: After hundreds of hours of research, Dave Forest has been just finalized a new special report called The Top 10 Stocks for the Next Decade. It identifies the companies that stand the greatest chance of becoming the Apples or Ciscos of tomorrow. To get access to this report and learn more about the boom that the national media is missing, simply follow this link.