3 Stocks With Major Catalysts on the Horizon

A real conundrum has emerged in the stock market: it's become quite easy to find undervalued stocks, but when you have too many to choose from, it's hard to see which choice will be the first to rise or has the greatest upside relative to the hundreds of other stocks that will eventually rebound as well.

Then again, if the market fails to recover in coming weeks, months and quarters, then all of these cheap stocks will probably remain at their current levels. So perhaps the best approach is to find undervalued stocks that could be the beneficiary of upcoming events or transactions, what Icall "catalysts." I've found three stocks that have clear catalysts in the months ahead...

1. RadioShack (NYSE: RSH )

Perhaps the closest catalyst is for this consumer-electronics retailer, which will commence a new sales agreement with Verizon (NYSE: VZ ) on Thursday, Sept. 15. Verizon controls roughly 40% of the wireless market, so the new relationship is bound to bring a lot more foot traffic than past relationships with other carriers such as Sprint (NYSE: S ) and T-Mobile.

And for this type of business, foot traffic is the name of the game. RadioShack needs people to visit stores and browse for hot products. These customers may not make their intended purchase that day, but they often leave with other items such as batteries, Bluetooth headsets, GPS devices, etc. If investors take note of any uptick in RadioShack's traffic, then they may stick around long enough to notice this stock's financials are hugely appealing. Sure, growth has been anemic, but RadioShack has still managed to generate very strong free cash flow in the $165 million range during the past five years. As a result, the company's share count has fallen from 180 million in 2003 to about 120 million today. Ongoing buybacks will take this number even lower, so per-share profits are bound to rise even if overall net income stays flat.

I'm guessing the Verizon deal will be a real plus for the stock, helping net income to grow at a moderate pace and earnings per share ( EPS ) to grow even more robustly (thanks to that shrinking share count). Analysts expect EPS to rise about 15% in 2012 to roughly $1.80, yielding a price-to-earnings (P/E) multiple below seven. On an enterprise-value basis, this stock is absurdly cheap, trading for less than four times earnings before interest, taxes, depreciation and amortization ( EBITDA ).

2. Take Two Interactive (Nasdaq: TTWO )

This video game developer has a pair of catalysts in the near future. The first involves the release of Max Payne 3, the latest title in the Max Payne action video game series, slated for launch in March 2012. This has led some analysts, including Brean Murray's Arvind Bhatia, to modestly raise EPS estimates for the current fiscal year that ends in March 2012.

The real catalyst, however, is the fiscal 2013 release of Grand Theft Auto V that has analysts salivating. This title is expected to be a blockbuster, which could singlehandedly push EPS from about $0.20 this year to the $2 to $3 range in fiscal 2013. It's not clear when in 2012 the game will be released, but shares have typically started to move up well in advance of major releases. Though the actual catalyst is a few quarters away, anticipation of the event makes this stock much more timely.

3. First Solar (Nasdaq: FSLR )

There has been a considerable amount of gloominess around the solar-power sector, led by weak spending from key European countries (Germany and Italy in particular) and the high-profile bankruptcy of a pair of U.S. vendors (Solyndra and Evergreen Solar). But First Solar, the industry's undisputed leader (with yearly sales approaching $4 billion) is far healthier than many of the industry's weaker players. If there is a further industry shake-out, then the company only stands to benefit.

Despite its relatively strong position, First Solar has seen its shares dragged down by a gloomy sector and a tough broader market, trading below $90 a share for the first time since 2007. But a pair of catalysts is in play to help revitalize the stock.

First, the company made heavy investments in its production lines in the second quarter, which should help generate stronger-than-expected results in the third and fourth quarters, according to Goldman Sachs. After seeing EPS steadily decelerate from $2 a share on September 2010 to $0.70 a share in June, a rebound is in the offing. The production line tweaks partially explain why EPS is expected to hit almost $3 in the current quarter and exceed $4 in the fourth quarter.

The other catalyst is several quarters away: First Solar has refined its technology to enable its solar panels boost their energy conversion ratio (the amount of sunlight that actually gets converted into energy) by 50% from around 11% to 16%. This is in line with conversion ratios generated by traditional poly-crystalline solar panel makers. The key difference is that First Solar's thin-film panels are far cheaper to produce than those produced by traditional vendors. With competitive solar-power output and much lower prices, look for First Solar to move even further away from the pack and cement its industry dominance.

This catalyst may be several quarters away (next summer or fall is a good guess), but look for analysts to start discussing it more frequently in coming weeks and months, helping move shares up from their current lows.

Risks to consider: RadioShack and Take Two Interactive depend on consumer spending to get by. First Solar must always keep an eye on industry pricing pressures in order to stay afloat.

Action to Take --> If you wait for a stock-boosting catalyst to transpire, then you'll likely have missed the boat. By the time RadioShack, Take Two Interactive and First Solar reap the benefits of their catalysts, you will likely have missed the stocks' upward moves. In these instances, all three stocks have at least 50% upside, but if you want to enjoy the gains, you should act sooner than later.

-- David Sterman

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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