The summertime isn’t exactly known as a great time of year for the market.
In fact, on average, the third calendar quarter is the slowest quarter of the year for stocks, with most companies focused on preparing for the fourth quarter, while most investors are thinking more about golf or fishing than which stocks to buy.
There are always exceptions to the third quarter doldrums, however, and 2015’s Q3 isn’t going to be any different. A handful of stocks are well positioned to recover nicely — and soon — even if the market remains sleepy.
And which stocks are going to rise above their lethargic environment? In no particular order, here a closer look at three of the top rebound stocks to buy heading into Q3.
Stocks to Buy: First Solar (FSLR)
After a disappointing 2014, shares of solar panel maker First Solar (FSLR) got the new year started right. In the first quarter of 2015, FSLR stock gained 33%.
It wasn’t meant to last, however. After continuing to make forward progress through the first half of April, First Solar is currently down nearly 20% from its April 24 peak.
The selloff was prompted by disappointing Q1 results. The company lost 62 cents per share of FSLR on $469 million in revenue. Analysts were looking for a top line of $599 million and a loss of only 29 cents per share.
So what makes First Solar worthy of being on a list of stocks to buy now?
Well, record-breaking efficiency of its thin-film solar panels certainly doesn’t hurt. The company announced just this week that it had made a thin-film module capable of converting 18.6% of sunlight into electricity.
The bigger and better reason FSLR is being added to a list of oversold stocks to buy at this time, however, is the FSLR-supported yieldco on the verge of going public.
While the premise of yeildcos as well as First Solar’s likely success in sponsoring one had been questioned at times, the market new seems to fully appreciate the fact that yieldco’s sizable dividend payout will drive some nice cash flow for a long while.
Stocks to Buy: Western Digital (WDC)
There’s no denying that the demise of the PC has led makers of hard-disk-drives (or HDDs) down a dark and tricky road. And worse, the buzz is that personal computer sales levels are once again slumping in Q2.
This dark shadow is undoubtedly impacting the industry’s stocks, including Western Digital (WDC). It’s down 17% year-to-date, including a 6% drop in the past three months.
But the worst case scenario may already be baked into the current price of WDC stock. Better yet, contrarian investors who understand that nothing lasts forever may find that WDC shares are ripe for a third-quarter turnaround.
Indeed, while Q2’s PC sales are apt to come in soft, they may not come in as weak as first thought. Longbow Research recently checked prices on hard disk drives, and found they were only between 1.1% and 3.2% lower.
“While we appreciate recent 2Q PC shipment data from Taiwan have been soft, for the HDD stocks the herd sentiment appears to be swinging too negative on PCs, and WDC’s CY2Q TAM guidance of 120M (vs. 125M PQ) does appear achievable, while STX’s 125M is at risk.”
In other words, WDC makes our list of stocks to buy because the sentiment pendulum has swung too far in the bearish direction and is close to swinging the other way.
Stocks to Buy: Xerox (XRX)
Last but not least, Xerox (XRX) is one of only a small handful of Q3 rebound stocks to buy primarily because its Q1 and Q2 pullback have left XRX undervalued.
Let’s call a spade a spade: Xerox isn’t a growth machine. Revenue has actually been weakening since 2011, as has net income. The only reason profits per share of XRX have managed to make even the slightest bit of forward progress is a relatively generous buyback program that as of 2013 was authorized up to $1.5 billion.
On the other hand, with $870 million in cash in the bank, operating cash flow reliably rolling in at better than $2 billion per year and annual net income of about $1 billion per year, Xerox is still a cash cow for the time being. The dividend yield of 2.2% XRX presently boasts is pretty well protected for at least a few more years.
Throw in the fact that shares are still in the hole 17% for the year, and it’s not hard to see how Xerox could find favor with the bargain hunters soon.
The company still needs to do something to stop its slow back-pedaling, to be sure. But it has several years to get it right before lackluster results become an operational problem. That said, the company may already be on the road to recovery.
Xerox recently announced it has added robotic processes to its automation solutions menu. While the company hasn’t yet set the world on fire in the automation arena, that market is brewing quite nicely.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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