The mega-cap space has no shortage of beaten-down stocks attracting value investors, from tech companies such as Hewlett Packard (NYSE:HPQ) and Cisco Systems (NASDAQ:CSCO) to financials like Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC). But the market has been stuck in a trading range for six months, and for now the mega-cap value stories don’t seem to be working.
For investors willing to go off the beaten path, three stocks that may offer more bang for your buck are Central European Distribution (Nasdaq:CEDC), VimpelCom (NYSE:VIP) and Corning (NYSE:GLW). While by no means easy money, these stocks present an opportunity to brave investors at their current levels. Here’s why:
Central European Distribution
CEDC is a U.S.-based company that produces and distributes liquor in Russia, Hungary and Poland. The stock, once a favorite of small-cap fund managers, has crashed from an April 2010 high near $40 to its current level of about $10. Investors lost faith in CEDC’s management last year after the company repeatedly missed already-reduced earnings guidance and blamed the shortfall on external factors. Higher input prices certainly played a part, but the company’s missteps prompted many fund managers to cut their losses and move on. The stock also came under pressure after Moody’s placed it on watch for a downgrade to its credit rating.
Today, investors remain skittish since CEDC continues to struggle under a massive debt load. Still, there are five key points to consider:
1) CEDC is frequently mentioned as a takeover target for a larger beverage concern, and it seems to be only a matter of time before the stock – with its digestible $737 million market cap – is bought out.
2) Three insiders, all directors, have purchased shares in the past four months.
3) In its most recent earnings release May 4, CEDC reported a profit of 2 cents (versus a loss of 34 cents in the same period a year earlier) on improving sales volumes. Importantly, cash flows are on the rise – allaying some of the fears about the company’s large debt.
4) Valuation: the stock is trading at 8.2x next year’s estimated profit of $1.25, a PEG of 0.6, and it stands at just 0.4 book value.
5) More than 10% of the shares sold short as of June 30, providing the fuel for an eventual rally.
CEDC remains a risky stock to own, and it is exposed to the movements of Eastern European currencies. Still, with fundamentals turning the corner and its valuation at a rock-bottom level, the risk-reward tradeoff in CEDC is very favorable.
VimpelCom
After approaching $16 in January, shares of this Russian telecommunications provider are now languishing near $12. The company surprised investors by bidding for the Egyptian company Orascom in late 2010, and the threat of additional acquisition activity continues to weigh on the stock. But a look past the headlines reveals a company that is expanding its emerging-markets footprint to more than 19 countries, making it a compelling play on the growing consumer wealth in the developing world. VIP’s earnings are expected to grow 12.2% this year and 14.1% in 2012, but its forward P/E is just 7.8 – not a bad price to pay for a growing company with high profit margins, above-average returns on equity, and a 4% yield that gives investors the luxury of being patient while waiting for this stock to come back into favor.
Corning
The largest of the three stocks discussed here, Corning – a maker of specialty glass products – has slid to $17 after trading above $23 earlier this year. Corning makes products used in smartphones and big-screen TVs, which has left it vulnerable to concerns about consumer spending. This fear is largely misplaced since the company has a diverse business mix and the benefit of strong end-market demand outside of the consumer area. Further, its innovative Gorilla Glass – which is unscratchable and unbreakable – is rapidly gaining market share and is on track for sales of $1 billion this year versus $250 million in 2010. The result is that earnings estimates for this year are holding steady and 2012 estimates have been rising, a rarity in an environment in which analysts have been slashing their estimates for tech companies. Corning also has a rock solid balance sheet, with net cash per share of $4. Still, the stock has a forward P/E of just 7.6x (a PEG of 0.71), or 5.8x when cash is accounted for. The stock yields 1.1% and is trading well below analysts’ mean target of $24.61.
The bottom line: while the major indices have provided only modest returns to investors thus far in 2011, the market remains rich with opportunities for those willing to look beyond the biggest-name stocks.
