Down But Not Out

10/26/2015


"Nowadays people know the price of everything and the value of nothing," Oscar Wilde once wrote. He could have been talking about the stock market. The recommended stocks in the table above seem unjustly depressed in the wake of the market's recent slump. We see their prices rebounding to more closely align with peer-group valuations. Two rebound candidates are reviewed below.

Among our recommended stocks, Community Health Systems ($41; CYH) earns the highest score for Value (98) and lowest for Performance (14). The shares have shed 16% in the past month, hurt by health-care's broad sell-off and the profit warning of rival hospital operator, HCA Holdings ($71; HCA). As we discuss in Portfolio Review, HCA said it treated a higher proportion of uninsured patients in the September quarter and was forced to use a greater number of contract (and more expensive) workers due to elevated volumes.

Whether these problems are exclusive to HCA or more widespread won't be clear until Community Health reports results on Nov. 2. Expectations look conservative, with the consensus projecting 4% higher revenue but 9% lower earnings per share. Investors already appear to be braced for the worst, so even decent results could give the shares a lift. Community Health is a Buy and a Long-Term Buy.


Shares of Skyworks Solutions ($78; SWKS) have plunged 25% since the S&P 500's record high on May 21. That slump has pushed the company's trailing P/E down to 16, well off its five-year average of 23 and the current median of 19 for S&P 1500 semiconductor stocks. But analysts remain bullish on the company's prospects. Profit estimates call for growth of 36% in the September quarter and 18% in fiscal 2016 ending September. Should Skyworks meet that target and its P/E ratio revert to the industry-group median, shares will reach $94 by early 2016. Skyworks has topped the consensus in four straight quarters.

Skyworks may find itself in a bidding war after smaller rival Microsemi ($35; MSCC) offered about $2.2 billion in cash and stock to acquire PMC-Sierra ($12; PMCS), which designs semiconductors that power networking equipment. Skyworks had agreed to pay $2 billion in cash for PMC in a deal that had already been approved by the boards of both companies. Microsemi's bid values PMC at a steep 50% premium to where shares traded prior to Skyworks' offer. Skyworks is a Buy and a Long-Term Buy. Our sister publication Upside rates Microsemi a Buy.

REBOUND PLAYS
Below we identify recommended stocks that seem capable of rebounding from their slumping performance since the S&P 500 peaked on May 21. Each stock trades at a sizable discount to its industry-group median for trailing earnings or estimated 2016 earnings per share. For example, Skyworks Solutions ($78; SWKS) shares would reach $94 if their trailing P/E ratio reverted to the median for S&P 1500 semiconductor stocks.
------- Price Change -------
Trailing P/E Ratio
P/E Ratio Based
On Fiscal 2016
----- Est. EPS -----
Implied Price If . . .
Quadrix Scores
Company (Price; Ticker)
1
Month
(%)
Since
Aug. 25
Market
Low
(%)
Since
May 21
Market
Peak
(%)
Stock
Industry Median
Stock
Industry Median
Trailing
P/E Reverts
To Industry
Median
($)
Fiscal
2016
P/E Reverts
To Industry
Median
($)
90-Day
Change
In Fiscal
2016 Est.
EPS
(%)
Value
Overall
Community Health ($41; CYH)
(16)
(21)
(24)
10
14
9
14
56
61
(1)
98
75
Gilead Sciences ($102; GILD)
(4)
(1)
(9)
10
27
9
17
277
192
4
94
99
Jones Lang LaSalle ($151; JLL)
0
2
(11)
16
17
15
15
166
153
1
70
93
J.P. Morgan Chase ($62; JPM)
1
4
(7)
11
12
10
11
68
69
(3)
88
68
Lam Research ($71; LRCX)
4
5
(13)
14
15
11
15
75
97
1
81
88
Lincoln National ($50; LNC)
4
7
(14)
8
11
8
10
63
62
(3)
97
83
Skyworks Sol. ($78; SWKS)
(13)
(4)
(25)
16
19
13
18
94
109
4
56
95
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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