by Jamie Dlugosch | October 23, 2011 7:00 am
The market is off to the races this month. After testing the lows on the first trading day in October, stocks have been in bull mode. This week, though, the market has leveled off a bit — and investors should use this brief pause to establish positions for what could be a significant end-of-year rally.
JPMorgan analyst Tom Lee is of the opinion that the market could gain 20%[1] between now and the end of the year. That could be good news for former high-flying stocks like Netflix (NASDAQ:NFLX[2]) and Green Mountain Coffee Roasters (NASDAQ:GMCR[3]), both of which have sold off heavily as of late.
Investors sure could sure use a rally to top off a long 2011. Owning stocks this year has brought little joy — sure, there’s no such thing as a free lunch, but there is something that’s occasionally supposed to come along with taking a little risk: higher returns.
While the market still is filled with fear, a path to higher stock prices could be paved by a solution (or positive signs of one) to the European debt crisis, as well as improved domestic economic data. Corporate earnings have been mixed but are mostly holding steady despite slower economic growth, so a boost in economic activity could make stocks jump, too.
No one can guarantee that stocks will find the elixir for our current malaise, but I’m an optimist. As such, I would suggest buying. Here are three stocks to consider in anticipation for an end-of-year rally:
Pantry Inc. (NASDAQ:PTRY[4]) operates convenience stores across the Southeast. The company has some 1,600 stores and fuel stations under various brands, including Kangaroo Express. PTRY shares have dropped precipitously since July, creating an excellent buying opportunity in advance of a year-end rally. The stock is down 30% since the first of July.
The selling is a bit counterintuitive. During the period of selling, gasoline prices have been falling. Lower gas prices typically result in higher margins for Pantry. Also, consumer budgets still are tight, and Pantry’s dual offering of gas and food can help shoppers eliminate an extra trip to the grocery store.
For the year ending Sept. 30, the average Wall Street estimate for PTRY profits is 97 cents per share. Next year, profits are expected to jump 57% to $1.53 per share. At current prices, Pantry Inc. trades for just 8.5 times forward earnings. The stock could jump to $20 per share with an end-of-year rally.
Another beneficiary of lower oil prices is Delta Air Lines (NYSE:DAL[5]). Higher jet fuel prices in the first and second quarters of this year crushed profit margins. Ticket price increases and surcharges could not make up the difference. As a result, DAL is one of the market’s worst-performing stocks this year; shares are down 33% since the start of 2011.
Take away the expense of higher jet fuel costs, and the picture is much more positive. Planes are flying full, and the economy, while not growing strongly, still is growing. Airlines are poised to make significant profits when (and admittedly, if) oil prices moderate.
Wall Street expects Delta to make $1.11 per share in the current year. In 2012, the estimate for profit grows to $2.06 per share. You can buy that 86% growth in profits for just 7.5 times current-year estimates. That is really cheap no matter how you cut it. I would buy this stock in advance of a year-end rally.
Alcoa (NYSE:AA[6]) kicked off the third-quarter earnings season by missing expectations. Alcoa reported a profit of 15 cents per share, while Wall Street was expecting 22 cents. A significant miss, but AA shares have held up well despite the result.
The low earnings should have been expected, as falling aluminum prices hurt Alcoa profits. The key to Alcoa is looking forward. Management was adamant about maintaining profit growth expectations for the remainder of the year. That statement helped support its current share price. And with the stock down 38% since July 1, the worst seems to already be priced into the stock.
A rally at the end of the year will occur on strong economic data. We already know automobile and airplane production are strong — and both of these are important for the aluminum business. AA shares could jump 50% before the end of the year — well ahead of Lee’s predicted 20% gain in the overall market.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.
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