Pullback Buys in Small-Caps

09/10/2015 9:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

While periods of stock-market turmoil can be good times to look for bargains, don’t confine your search to the most beaten-down stocks, cautions Richard Moroney, editor of Upside.

The best values often display superior relative strength during market pullbacks, you should focus on how much a stock could rise, not on how much it has fallen.

The stocks below have superior year-ahead potential and implied upside based on at least 12 of our 15 price targets.

Our implied price targets indicate average upside potential of 103% for shares of Cardtronics (CATM). That seems optimistic, but we see potential catalysts that could push the stock higher.

Cardtronics shares remain down 8% since July 7, when the operator of automated teller machines announced it would lose is largest customer, 7-Eleven, in 2017.

Since then it has renewed long-term contracts with Speedway and Sunoco. It also secured deals to place its ATMs in three new US airports.

The trailing P/E of 13 hovers near its lowest point since 2009 and below its five-year median of 32. If its P/E based on estimated 2015 earnings reaches its industry median of 19, the shares would reach $54.

On Assignment (ASGN) shares are 16% below their 52-week high. At 16 times trailing earnings, the stock looks attractive considering the company’s operating momentum.

Leveraged to the improving job environment, On Assignment places skilled workers in the technology, engineering, and life sciences fields.

It may be a stretch for the trailing P/E to return to its five-year median of 26. But if it rises to the median of 19 for S&P 1500 employment-services stocks, the  shares would climb 20%.

STRATTEC Security (STRT) supplies locks and keys, door and lift-gate systems, and driver controls to automakers.

Its shares—caught up in the broad slump suffered by auto-parts suppliers—have fallen 10% in the past three months.

But operating cash flow and free cash flow both improved for the second straight quarter and management increased the quarterly dividend 8%.

The stock trades more than 25% below industry-group medians for trailing P/E, forward P/E, price/sales, and price/ cash flow ratios.

Should STRATTEC’s trailing P/E of 11 conform to industry norms, the stock would reach $89.

Wabash National (WNC) is a maker of semi-truck trailers. Industry-wide trailer production in 2015 is expected to increase 14% on strong replacement demand.

In August, Wabash reiterated its full-year earnings guidance, which had been raised one month earlier. The midpoint for per-share profits is $1.30, implying 46% growth.

If Wabash meets the consensus profit estimate of $1.29 and its trailing P/E ratio reverts to its five-year median of 16, the stock would reach $20 by early 2016.

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