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Where Can You Find Value In This Market? + Vic Wisemann’s Thoughts on: COF, AXP, BK, EK, KEY, PEP, MCD

Vic Wisemann
InvestorsObserver
Featured Contributor

A fairly valued stock is a stock whose perceived value is equal to its current market value. Not every investor uses the same criteria when deciding if a stock is fairly valued. Some investors use a multiple such as a stock's price to earnings ratio (PE Ratio) or price to sales ratio to determine if a stock is fairly valued.

Other investors determine if a stock is fairly valued based upon projected future earnings of the underlying company. Still other investors accept the open market value of a stock when deciding what is fairly valued. All things being equal, a fairly valued stock has a better chance of appreciating than a stock that is overvalued at the time of purchase.

Read on to see where you can still find value in the market.

When the stock market hit 12 year lows in March, no matter what measure you used, the market was undervalued. After a thirty plus percent rise in the past few months, many believe the market could be fairly valued. Stocks have been giving back some value following solid gains in March, April and May.

All of a sudden, investors are finding things to worry about again. The spike in long-term Treasury yields and oil prices has people concerned that inflation may be around the corner. And if bond rates keep rising, that could jeopardize an economic recovery.

But a pause in this rally may not necessarily be a bad thing. The surge since the March 9 lows was possibly just a prolonged sigh of relief. The market wasn't necessarily charging higher on hopes of a rapid and robust recovery.

Instead, stocks were skyrocketing on the notion that not every big bank was going to fail or need to be nationalized. Capital One Financial (COP), American Express (AXP) and Bank of New York/Mellon (BK) are even paying back TARP funds. Not every retailer was destined for Chapter 11 bankruptcy or outright liquidation. The unemployment rate wasn't going to head to Depression-era levels.

This huge move in the market has astounded bears who thought the Great Depression was starting all over again, and delighted beaten down, long only investors. The question of whether we are in a bear market rally or the beginning of a new bull market is a question only time can answer. Regardless, there are several stocks that have not participated fully in the rally and thus may provide an investment opportunity.

Eastman Kodak (EK) is off its March lows but dragging along under $3.00 per share. The company, which had been trying to make the transition to the digital age, reported a large loss in the first quarter and had to suspend its dividend. The interesting part is that Kodak is in a zero net debt position with its cash and equivalents slightly higher than its debt as of March 31.

KeyCorp (KEY) is also trading at the lower end of its 52-week range. The bank was one of the 19 recently assessed as part of the Supervisory Capital Assessment Program (SCAP). KeyCorp was rallying nicely with the rest of the financial sector until it announced a $750 million issuance of common stock. Investors have reacted negatively to this news, but it's possible that this is a short-term reaction and the capital raise makes the company more likely to survive long term.

Pepsico (PEP) is up significantly from the low of $43.40 it traded at in March. The company is solidly profitable but may have suffered from sector rotation, as investors view its products as recession resistant and have sold the stock to move into names with a higher beta. The company is also involved with a rather nasty dispute with its bottlers.

Another stock that might be suffering from investor flight to names with more upside is McDonald's (MCD). Many consumers substituted fast food restaurant trips for more formal dining during the recession, and this kept investors in the stock until recently.

Some may be concerned that these last two stocks may continue to underperform if the rally continues. There is some logic in that argument but since both are large cap names without serious issues, as idle cash pours into the equities, these should rise with the general level of the overall market.

For a hedged trade on MCD consider the September 50/47.50 Bull Put spread for a 30 cent credit. That's a 13.6% return and the stock has to fall over 14% to cause a problem.

It's not too late for investors to get in on the rally, as many large cap stocks have underperformed. While some of these deservedly have lagged the market, several others might provide an opportunity for investors.

If you have had any additional thoughts, ideas or hidden gems in the market please e-mail me at vwisemann@InvestorsObserver.com.