4 Stocks Poised for a Post-Summer Rally

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As the market grinds down toward the end of the summer, we're seeing the typical seasonal malaise when a number of good companies quietly drift down to 52-week lows. And the selling may not be over. The S&P 500 has historically been the weakest in September, dropping an average of -1.3%. The good news: stocks really build a head of steam after that. The S&P 500 typically rises +0.7% in October, followed by average monthly gains of +1.5%, +1.9% and +2.1% in each of the next three months.

Savvy investors always keep some cash on hand for these summer doldrums, as it can be a fertile time to start researching unloved stocks that should find new appreciation as summer turns to fall. Here are four names hitting new 52-week lows on Friday that should be quite appealing for long-term investors.

MedcoHealth Solutions ( MHS )
Earlier this summer, we saw a considerable dust-up between CVS ( CVS ) and Walgreen ( WAG ) as those two firms fought over a pharmacy benefits manager ( PBM ) contract. As we looked into the PBM sector in June, we saw still-considerable growth prospects, especially for rival MedcoHealth. [Read: The Real Winner in the Battle between Walgreen and CVS ]

Since then, shares have fallen out of favor. In late July, the company issued second-quarter results that were in-line with expectations, but it became apparent that the company saw only a +3% year-over-year profit boost for each prescription filled, below the +5% growth rate analysts had expected. The company also admitted that a +5% to +10% growth rate for this metric would no longer be achieved.

Notably, analysts' earnings estimates have barely budged, yet the shares are now some -20% lower. It's important to know that PBM firms always show erratic quarterly trends due to the lag time between changing drug prices and the PBM's ability to pass long those changes. Yet this still remains as a solid growth play: profits are expected to grow roughly +20% this year, and another +17% in 2011. Shares trade for less than 12 times next year's forecast.

Winnebago ( WGO )
This maker of recreational vehicles (RVs) saw its shares surge this spring as word spread that baby boomers were returning to RV showrooms in droves. Fiscal third quarter results released in June reflected an earnings blowout. Since then, shares have lost roughly half their value on ever-shrinking trading volume. Part of the share price malaise is due to the fact that Winnebago has already released results for its seasonally most important quarter. The company's fiscal fourth quarter results, which should be released in early September, are likely to be comparatively uninspiring.

Winnebago lost more than $1 a share last year, but thanks to massive cost cuts and a rebound in demand, the company should earn roughly $0.30 in the fiscal year ending this month. That's hardly a profit level to inspire shares, but it's worth remembering that Winnebago earned $4 to $5 a share back in the middle of the last decade. The company is likely still a few years away from that kind of earnings power again, but shares below $9 are cheap in the context of that long-term earnings strength.

Wells Fargo ( WFC )
This is a classic case of the baby being tossed out with the bath water. As we saw in the economic crisis of 2008, Wells Fargo has proven to be an extremely well-run bank, avoiding imprudent risks while aggressively acquiring weaker financial franchises on the cheap. Of course, the economy is pretty dicey right now, and bank stocks in general are being shunned, so there's little interest in loading up on solid players like Wells Fargo right now.

Yet Wells Fargo has all of the traits I look for when seeking long-term holdings: A very solid brand, a track record of playing defense in tough times, rising profit estimates and a robust balance sheet .

To be sure, the ongoing mortgage crisis means that Wells Fargo may still report some weak results in its consumer lending division, so some investors are waiting to see how the ongoing housing slump plays out during the October earnings season . There's no rush to buy this name immediately, but shares should be a solid rebound candidate when the economy starts to show initial signs of life. 

Best Buy ( BBY )
I recently wrote about this consumer electronics retailer, so I'll refrain from further commentary here except to note that shares hit a fresh 52-week low on Friday, owing in large part to the fact that few near-term catalysts exist. [Read: George Soros' Favorite Retail Stock ]

The company's fiscal second quarter results (due for release in mid-September) are likely to be so-so. The same may be said of the subsequent quarter, which ends in November. But after that, we get the all-important holiday season, which could still be quite solid, thanks to a raft of hot new products and an ever-shrinking set of retail competitors.

Action to Take --> All four of these stocks are great long-term holdings, as they have strong brands and solid market share in their respective industries.

In order of timeliness , Medco looks to be the first one to find fresh appeal, followed by Best Buy (thanks to the holiday selling season), Wells Fargo (as expectations for an improving economy in late 2011 and into 2012 could perk up shares this winter), followed by Winnebago, which may stay out of favor until the RV maker approaches its next season of strength. Yet Winnebago likely has the greatest long-term upside of these names, and could eventually double or even triple from current levels. 


-- David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More...

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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This article appears in: Investing , Investing Ideas

Referenced Stocks: BBY , CVS , MHS , PBM , WAG , WFC , WGO

David Sterman

David Sterman

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