Should in­vestors buy th­ese 4 ‘bad news’ stocks for big gains?

Financial Mirror (Cyprus) - - FRONT PAGE - By Lee Jack­son

Of­ten when a com­pany presents bad news, it is for a real rea­son, and it may in­deed be a harbinger of worse things to come. Some­times, though, bad news is mis­con­strued by Wall Street, and what may very well be a tem­po­rary or tran­si­tory in­ci­dent is plugged into the long-term the­sis and a good stock goes the wrong way.

A new re­search re­port from Jef­feries about one large-cap blue-chip tech gi­ant that re­cently posted some news that Wall Street did not like got us to ex­am­ine other sim­i­lar sto­ries that have oc­curred re­cently. We found four good ex­am­ples of blue-chip stocks that got a lit­tle tar­nished re­cently for one rea­son or an­other that in­vestors may want to re­ex­am­ine. They are Ab­bVie Inc. (NYSE: ABBV), Amer­i­can Ex­press Co. (NYSE: AXP), EMC Corp. (NYSE: EMC) and In­tel Corp. (NAS­DAQ: INTC).

Here the clas­sic big phar­ma­ceu­ti­cal stock that was sold be­cause of com­pe­ti­tion within the mar­ket­place, which may not turn out to be a fac­tor at all. Trad­ing at over $70 last De­cem­ber, the stock bot­tomed out re­cently, down al­most 20%. Af­ter back­ing out of a deal with Shire PLC (NAS­DAQ: SHPG) as tax in­ver­sion trans­ac­tions be­came un­work­able, the com­pany shot up to the De­cem­ber highs as ar­bi­trage ac­counts cov­ered the short po­si­tions on the stock.


Af­ter the quick rise at the end of the year, the stock was sold off in a big way when Wall Street started to be­come con­cerned over lower ex­pec­ta­tions for the com­pany’s new hep­ati­tis C ther­apy, Viekira Pak. In re­al­ity, the big­gest con­cern was re­ally a price war with com­peti­tors. Toss in a $21 bln pur­chase re­cently of Phar­ma­cyclics Inc. (NAS­DAQ: PCYC), and you now have what can be called the re­turn of the risk ar­bi­trage zom­bies.

The bot­tom line is the com­pany has a killer pipe­line, and the Jef­feries team is very pos­i­tive on the stock, cit­ing nu­mer­ous driv­ers that they dub an “ice­berg” of pos­i­tive cat­a­lysts for the stock in 2015 and be­yond, es­pe­cially af­ter the sell-off.

Ab­bVie in­vestors are paid an out­stand­ing 3.55% div­i­dend. Jef­feries has a price tar­get for the Buy-rated stock that is a whop­ping $80. The Thom­son/First Call con­sen­sus price tar­get is $68.64. Ab­bVie closed Fri­day at $58.00 a share.

The com­pany was hit hard when the ex­clu­sive deal it had with ware­house re­tail gi­ant Costco Whole­sale Corp. (NAS­DAQ: COST) re­cently ended. In fact, not only did the stock drop al­most 17% from highs in Jan­uary, but many of the top firms on Wall Street cut the rat­ings they had on the credit card gi­ant. Af­ter post­ing out­stand­ing re­sults on the Fed’s stress test, many of the top firms on Wall Street are re­con­sid­er­ing the re­cent down­grades, as the share buy­back will now be more than ex­pected.

Amer­i­can Ex­press’s 2014 cap­i­tal plan al­lowed re­pur­chases of up to $4.4 bln, plus an ad­di­tional $1.0 bln in the first quar­ter 2015. The com­pany’s fis­cal 2015 plan in­cludes $6.6 bln of stock re­pur­chases from the sec­ond quar­ter through the sec­ond quar­ter 2016. The com­pany is also in­creas­ing the div­i­dend paid to share­hold­ers by a siz­able 12%.

Amer­i­can Ex­press share­hold­ers are cur­rently paid a 1.3% div­i­dend. Jef­feries has the stock rated Hold, with an $85 price tar­get. The con­sen­sus tar­get is $87.40, and shares closed Fri­day at $80.60.

Shares are trad­ing at an in­cred­i­bly low 14.5 es­ti­mated ad­justed 2015 earn­ings, ver­sus 15.1 for 2014. The com­pany is the leader in stor­age, and the con­stant in­crease in data makes the stock a core hold­ing for tech­nol­ogy in­vestors. EMC missed rev­enue es­ti­mates for the fourth quar­ter and just squeaked by on the bot­tom line, beat­ing es­ti­mates by a penny.

With the com­pany ex­pected to buy back $3 bln of stock in 2015, and the lower VMware Inc. (NYSE: VMW) num­bers baked into fu­ture cal­cu­la­tions, now may be a good time to add shares of this out­stand­ing tech­nol­ogy stock. EMC owns 80% of the cloud soft­ware com­pany, and ac­tivist in­vestors have urged a spin-off, which does not seem likely in the near fu­ture.

This past week a Wall Street an­a­lyst from Wells Fargo was not thrilled with the progress the com­pany is mak­ing and said the stock was “dead money.” The an­a­lyst ar­gued that un­til nu­mer­ous cat­a­lysts kick in, the stock will go nowhere. The stock, which al­ready had rolled over to start March, was ham­mered. This may give in­vestors the best en­try point in some time to this qual­ity old­school tech stock.

EMC in­vestors are paid a 1.8% div­i­dend. The Jef­feries price tar­get for the Buy-rated tech gi­ant is $31, and con­sen­sus tar­get is posted at $30.74. EMC closed Fri­day at $26 a share.

This is the stock that got us to look­ing for the other bad news bears that Wall Street was tak­ing to the wood­shed for a beat­ing. The iconic chip gi­ant had a stel­lar 2014 on the tail­wind from con­tin­ued PC and note­book sales. The stock has un­der­per­formed the S&P 500 by a mas­sive 14% year-to-date, and last week the com­pany dramatically low­ered es­ti­mates for the first quar­ter, an event that was not al­to­gether un­ex­pected.

The Jef­feries team points out that earn­ings con­fes­sions are not that un­usual in the chip world, and his­tory sug­gests buy­ing the con­fes­sion pays off in semi­con­duc­tors. They are of the opin­ion that last week’s an­nounce­ment is a stel­lar op­por­tu­nity for in­vestors to buy a qual­ity stock.

In­tel in­vestors are paid an out­stand­ing 3.13% div­i­dend. Jef­feries has the stock rated a Buy and dropped the price tar­get slightly from $50 to $48. The con­sen­sus tar­get is much lower at $35.75. Shares closed trad­ing on Fri­day at $30.93.

It is one thing to try to grab the prover­bial fall­ing knife when buy­ing beaten down stock. It is quite an­other to get the op­por­tu­nity to buy blue-chip mar­ket lead­ers on the cheap, es­pe­cially with the stock mar­ket still close to all-time highs.

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