These stocks are the treasure in the market’s trash

 

Great news! Investors today are more jittery, panicky, and prone to emotional overreaction than they have been at any time in living memory! A few years back, jittery investors had to wait until they read the morning newspaper before they got any bad news related to the stocks they owned, and many assumed, quite rightly, that by that time, the stock price had already fully adjusted to the realities of the new situation, at least as far as the market understood what those realities were.

Today, every idiot can panic in real time, and because that means they panic together, the result is often spectacular enough to cause even more panic, and thus the feedback wave builds. It is not at all uncommon for a stock to lose 25% or more of its value, even while the underlying company’s strength is more or less unchanged, and when that happens, a wise investor will step in and take advantage of the situation. Remember — it is morally wrong to allow a panic to go unpunished.

Be sure to consider the ideas presented here to be just that, ideas, and do your own research before investing.

American Airlines (AAL)

These are good times for airlines, as people are beginning their summer travels, yet the price of oil — and to a lesser extent, jet fuel — remains low. American Airlines is the largest airline in the world, thanks to its 2013 merger with US Airways group. The company is now investing heavily in improving its performance, in an attempt to catch Delta (DAL), which has recently been performing at an unprecedented level.

In April, American Airlines reported first-quarter results that the Street wasn’t happy about. In particular, the Street didn’t like the fact that the company’s revenue fell by 4% from the year-ago quarter. Still, no one really expected this to be a growth year for the industry. Given how well things seem to be going, AAL stock trades at a surprisingly large discount.

AAL

Chart courtesy of www.stockcharts.com

Solar City (SCTY)

Solar City is one of two publicly traded companies helmed by Elon Musk, and unsurprisingly, SCTY became a closely watched stock back in 2013 after TSLA went through the roof. But where TSLA shares went through the roof, SCTY stock has repeatedly fallen off of it. The company, meanwhile, has been expanding from roof to roof to roof.

Things began to look bright for the company this year, due in large part to a huge deal with the state of New York. At one point, shares were up by more than 70%! More recently hedge fund manager Jim Chanos, who is short the stock, has been claiming the company is in financial trouble. The problem with Chanos’s prediction is that despite not being profitable yet, the company is nonetheless growing at an astonishing 60%, year over year. Shares of SCTY could realistically be worth twice what they are now within 18 months.

SCTY

Chart courtesy of www.stockcharts.com

Mobileye (MBLY)

Mobileye went public back in 2014, and for a time, MBLY stock was one of the Street’s darlings. Since the summer of 2015, however, the stock has been beaten down by the market, losing most of its value. This is simply shortsightedness on the part of the Street, as the company’s potential remains almost limitless, and its revenue growth remains explosive.

While Google (GOOGL), Tesla (TSLA), and Apple (AAPL) dream of a driverless car revolution, Mobileye is quietly making it happen by rapidly advancing driver assistance technology. While the company does have competitors, it continues to increase the size of the gap between itself and all challengers. Add to that a very high profit margin of 28%, and you have all the ingredients for soaring stock stew.

MBLY

Chart courtesy of www.stockcharts.com

Apple (AAPL)

As anyone who followed the market or even the news last year knows, Apple is the greatest company that has ever been or ever will be, and it will soon be worth more than one trillion dollars. Well, unless of course they also followed the market last month, as in April, investors realized for the first time that the company had not revolutionized or created from scratch a single new technology industry in more than five years! It seems that all this time, we’ve been betting on a behemoth that knows how to do nothing but release the same slightly tweaked phone again, year after year.

So, is it possible that we tend to hold Apple to unreasonable expectations? It is true that Apple’s earnings and revenue have mostly gone flat, but AAPL trades at an extremely low multiple (it has a P/E Ratio of 10), especially for an industry-leading technology company. AAPL shares lost 20% of their value in April due to simple impatience. Most likely, those who sold AAPL in April will buy it back when the stock is hot again, and they’ll likely have to pay a lot more for it. If you (like me) are among the very many who own shares of AAPL, it really makes a lot more sense to just hold onto them.

AAPL

Chart courtesy of www.stockcharts.com

Illumina (ILMN)

Here is another incredibly promising company, an industry leader in one of the most exciting industries in the world, genetic sequencing. As the potential of personalized medicine is only now being discovered, there is essentially no limit to the potential growth here. Unfortunately, sales have been slower than expected recently, particularly in Europe, and that has caused Illumina to revise its expected 2016 revenue growth down from 16% to 12%. That, of course, demonstrated the danger in growth stocks — since most of their value is in the presumed growth, value is lost rapidly when that growth goes away. ILMN fell from $178 per share to $136 per share on this news. Ouch!

Keep in mind, however, that the company still has game changing, life changing, world changing technology to sell, and ILMN shares have been sufficiently beaten down for the slower growth. The future is on Illumina’s side, and I fully expect that even investors who bought ILMN at its high of $240 will be richly rewarded for the prescience, if only they have the patience to stay the course.

ILMN

Chart courtesy of www.stockcharts.com

Symbols: AAL AAPL ILMN MBLY SCTY
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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