(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Price data sourced from Fidelity, short data from Yahoo! Finance, all other from Finviz.)
The Standard and Poor's 500 index valuation has hit 25% below the average from the last nine recessions, even as price estimates continue to fall, according to Bloomberg's data. These estimates provide a statistically significant outlook on analyst expectations for future growth and the degree to which stocks might be considered undervalued.
Historically, market contractions have not reached these lows since 1957 when the gauge for American equities traded at 13.7 times forecast earnings. Today's equities trade at 10.2 times 2012 forecast earnings and earnings estimates continue to fall to their lowest level since April.
"What you’re seeing is a growth scare," Wayne Lin, a money manager at Baltimore-based Legg Mason Inc. "The question is, how much of that is priced in. I’d say that if we don’t have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades." (via Bloomberg)
Unlike previous market crashes or recessions, this one has been relatively slow-going. In the previous nine quarters, companies prepared for further economic volatility and managed to exceed income forecasts after cutting costs and lowering debt. With lowered analyst estimates for 2012 companies will have an easier time hitting their mark.
Whether or not lowered earnings estimates makes today's stock prices a bargain is an ongoing debate between bears and bulls. According to Rob Arnorr, founder of Research Affiliates LLC, "the measures by which stocks are cheap today rely on continued recovery and a continued surge in already peak earnings. It relies on a very shaky foundation."
In consideration of the above we wanted to know what stocks have had bad news priced in, but might benefit if the market takes the side of recovery rather than a double dip.
To create such a list we started with a universe of companies that appear to be deeply undervalued based on the Price to Earnings Growth, Price/Sales and Price/Cash ratios.
We also collected data on short seller trends, and identified which of these undervalued stocks are seeing significant short covering (i.e. a bullish trend, contradicting the bearish sentiment that has dragged on these companies over recent weeks).
In other words, short sellers think the upside potential of these undervalued names outweighs the downside. Do you agree?
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List sorted alphabetically.
1. GT Advanced Technologies, Inc. (GTAT): Provides polysilicon production technology and multicrystalline ingot growth systems, and related photovoltaic (PV) manufacturing services for the solar industry worldwide. PEG ratio at 0.45, Price/Sales ratio at 0.89, and Price/Cash ratio at 1.88. Shares shorted have decreased from 24.57M to 22.73M over the last month, a decrease which represents about 1.46% of the company's float of 126.19M shares.
2. Zhongpin, Inc. (HOGS): Engages in the processing and distribution of meat and food products primarily in the People's Republic of China. PEG ratio at 0.26, Price/Sales ratio at 0.26, and Price/Cash ratio at 2.03. Shares shorted have decreased from 8.11M to 7.53M over the last month, a decrease which represents about 2.6% of the company's float of 22.35M shares.
3. LDK Solar Co., Ltd. (LDK): Engages in the design, development, manufacture, and marketing of photovoltaic (PV) products; and development of power plant projects. PEG ratio at 0.09, Price/Sales ratio at 0.16, and Price/Cash ratio at 0.73. Shares shorted have decreased from 37.28M to 29.82M over the last month, a decrease which represents about 10.96% of the company's float of 68.09M shares.
4. OmniVision Technologies Inc. (OVTI): Designs, develops, and markets semiconductor image-sensor devices. PEG ratio at 0.38, Price/Sales ratio at 0.81, and Price/Cash ratio at 1.65. Shares shorted have decreased from 7.54M to 6.97M over the last month, a decrease which represents about 1.02% of the company's float of 55.75M shares.
5. Veeco Instruments Inc. (VECO): Designs, manufactures, and markets equipment to make high brightness light emitting diodes (HB LEDs), solar panels, hard-disk drives, and other devices. PEG ratio at 0.32, Price/Sales ratio at 0.91, and Price/Cash ratio at 1.73. Shares shorted have decreased from 11.87M to 10.96M over the last month, a decrease which represents about 2.58% of the company's float of 35.33M shares.