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The summer brought a number of major selloffs among top stocks, which have led to great buying opportunities.
Summer is unofficially over — unofficially, summer runs from Memorial Day to Labor Day. This summer brought with it a volatile market, where some major names were severely punished.
In a market that’s trading at all-time highs, sometimes it’s worthwhile to look at market overreactions in an effort to find great buying opportunities.
Walgreen (NYSE: WAG) is a prime example of a summer overreaction. Shares tumbled nearly 20% after revising earnings expectations for next year.
The market failed to recognize the long-term benefits of its Alliance Boots acquisition, instead focusing on the short-term costs. The stock has rallied 8% since its summer-lows, but still finished down 11% for the summer months.
There are a number of other stocks that the market has shunned. Here are Wall Street’s Top 3 Summer Overreactions:
No. 1 Wall Street’s Overreaction This Summer: Whole Foods Market (NYSE: WFM)
This natural grocery chain was down the most of our three overreactions this summer, with shares down 21%. Driving the stock down has been concerns of rising competition in the natural and organic space. Remember that Wal-Mart (NYSE: WMT) said it was working with Wild Oats to lower the prices of organic foods back in April.
As a result, Whole Foods has been lowering prices in an effort to keep its market leading position. This has led to fears over the company’s margins. Whole Foods is now turning to cost cutting to help offset this.
As well, in an effort to maintain its market share, it’s launching its first nationwide marketing campaign. And will also expand its home delivery service. There’s still a big market opportunity for Whole Foods. Sales of natural and organic foods is expected to grow at an annualized 11% from 2013 to 2020, per Nutrition Business Journal.
Whole Foods also offers a 1.3% dividend yield and initiated a $1 billion buyback program last fiscal quarter — good enough to reduce shares outstanding by 7%.
No. 2 Wall Street’s Overreaction This Summer: Melco Crown Entertainment (NASDAQ: MPEL)
Shares of Melco were down 17% over the summer, due to weakness in Macau gaming. The VIP (high-roller) segment in the region has been coming in weaker than expected for the last few months.
Macau overtook Las Vegas in 2006 as the number one gambling market in the world by revenues and hasn’t looked back since. In 2013, Macau brought in gaming revenues over seven-times that of Vegas.
Quite simply, it’s a long-term play on the rising middle class in China. Macau is the only region in China where gambling is legal, and about half of the visitors to the region are from mainland China.
Melco has two casinos in Macau and a majority interest in the soon-to-open Macao Studio City casino. It’s also constructing a casino in the Philippines.
Its Altira casino focuses on the VIP market, while its City of Dreams is for the mass market. Melco’s City of Dreams casino is the first one visitors come to when getting off the ferry to Macau. Meanwhile, its Studio City casino will also be tailored for the mass market, further reducing its reliance on the VIP market.
Shares of Melco trade as the cheapest major casino operator in Macau.
Its P/E (price-to-earnings) ratio is 19, below the likes of Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN). Factoring in Melco’s expected earnings growth and its P/E-to-growth rate (PEG) ratio is under 1 — anything below 1 is considered to be a great growth at a reasonable price stock.
No. 3 Wall Street’s Overreaction This Summer: GlaxoSmithKline (NYSE: GSK)
GlaxoSmithKline was down 11% over the summer after lowing its near-term earnings expectations. Part of the issue has been weakness in the company’s top-selling drug, Advair. Product sales were down 12% year-over-year last quarter due to pricing pressures.
However, the company is working on a number of key transactions that will reduce its reliance on Advair and grow earnings over the interim. What’s more is that after the selloff, GlaxoSmithKline now trades at the lowest P/E ratio of all the major pharma companies, coming in at 15.
GlaxoSmithKline plans on selling its oncology business to Novartis (NYSE: NVS), while also purchasing Novartis’ vaccine segment. Then, the two will combine their consumer health business.
These transactions give GlaxoSmithKline the opportunity to get out of the low-growth oncology business and increase its exposure to the faster growing healthcare and vaccine markets. GlaxoSmithKline will own 63.5% of the combined consumer healthcare company and give it more exposure to over-the-counter products and reduce the impact of patent cliffs.
In a market that has the S&P 500 trading at an average P/E ratio of 20 — multi-year highs — finding undervalued investment opportunities is becoming increasingly important.
One of the most underrated ways of doing this includes looking for buying opportunities in stocks that have been unjustifiably sold off. The 3 stocks above seem to fit this bill nicely.
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