Still Looking to Buy? 3 More Stocks Ready for a Rebound

“Don’t throw the baby out with the bathwater.”

That’s a tall order when you can’t tell what’s the baby and what’s the bathwater.

As investors’ portfolios are dragged through the mud, we look to clever adages in an effort to find some concrete truths in uncertain times. Here’s another:

“Don’t try to catch a falling knife.”

Fine, but if I see a knife hits the ground, I’m going to pick it up before anyone else does.

Third place may not win, but it still earns a medal.

For example, many people (myself included) looked to Coca-Cola (KO) and/or Pepsi (PEP) during the recent downturn, given that a large amount of their sales come from outside the United States. This is great for two reasons – it doesn’t rely solely on the US economy, and it gets paid in other currencies besides the US dollar.

However, what about Dr. Pepper Snapple Group (DPS)? Besides the obvious beverages the name bears, the third-largest soft drink company in the world also produces 7UP, Mott’s, Hawaiian Punch, A&W, and more than 40 other brand names throughout North America.

Snore. Boring. But the following is much more interesting:

Shares of the company were originally spun out as dividends to shareholders of Cadbury-Schweppes (CSG) at $27.50 per share. Any mutual funds (as well as investors) who didn’t have enough of a sweet tooth to desire ownership in that segment of the business sold the stock. Hence the fall from its high of nearly $30 in May to its most recent price around $21.

Those big funds might not be thirsty, but I know that Diet Dr. Pepper tastes just like regular Dr. Pepper.

And I know that this stock, trading at a measly P/E ratio of 10 (Coke and Pepsi are about double that) could easily take a trip to the upside. Diversified in both product and geography, it may not be a home-run, but it could bring in a few RBIs.

 

Tracking auto makers? Invest in the things they need.

It should come as no surprise that automakers do not manufacture all of the parts of their cars. It’s just not efficient.

We’re not going to think about plays on the automakers. They make me nervous.

Instead, we’re going to think about plays on their parts. Regardless of which automobile companies enjoy success (i.e. don’t go bankrupt) in the near future, each of them requires certain components in their vehicles. One of those necessities is safety equipment.

Autoliv (ALV) is a Swedish company that owns patents on most seatbelts and airbags, but also produces steering wheels, safety electronics, night vision safety systems, and child seats.

So what has the stock done lately? Early in May, ALV touched above $60 per share and now trades around $39. It obviously hasn’t worn its safety belt. Weak, but I couldn’t resist.

Such blatant abuse of the price is due to slumping US auto sales. However, this drop is too extreme to defend or justify. Developing countries are experiencing an increasing demand for automobiles that will eventually more than offset any weakness in US demand (Autoliv already sells its products to 30 countries around the world).

In addition, regardless of whether the worldwide energy situation compels auto makers to produce gasoline, hybrid, or electric cars in the future, those vehicles will need safety equipment.

More importantly (and more technically), the stock has been bucking this downtrend in the past couple weeks of trading. It currently sits at an absurd P/E ratio of 9, when it should be more than twice that amount.

Oh, while you’re waiting for this thing to ramp up, at current prices owners will enjoy the 4% dividend it churns out. That’s almost reason enough.

Drilling for profits: Take your pick

Truthfully, you could throw Atwood Oceanics (ATW), Anadarko (APC), Nexen (NXY), ENSCO International (ESV), and Petrobras (PBR) in a bag, shake it up and pick one out. Each of these stocks is coming into strong support after falling anywhere between 20% and 33% off their 52-week highs in May-July.

However, I find it my responsibility to narrow these choices to the one with the most potential to increase in value.

ENSCO International has its act together.

The international offshore contract drilling company has essentially formed a mini-monopoly in the shallow drilling waters in the Gulf of Mexico as other old iron jackup rigs have fled. With its pricing power increased and more than 90% utilization rates, the company looks to maintain profitability.

Its proactive approach in upgrading and building new vessels (six are scheduled within the next four years) keeps it ahead of the competition. Why? Because you can’t build a drilling vessel over the weekend. The contracts will go to the corporation who is ready to drill when demand requires it.
Amidst this positive outlook, the stock has tumbled from its 52-week high of $83.24 down to just above $65 in the past month and a half (currently bouncing off its 200-day moving average. Hint, hint.). Most likely this is a result of oil prices pulling back and investors’ profit-taking after the stock’s six-month run.

The stock is trading at a P/E ratio of 8.8, when the industry average is 14.

I like – I’m sorry – love this thing anywhere around $60-$65.

John K. Whitehall
Analyst, Bourbon & Bayonets