Five Oversold Stocks: One Is a Strong Buy, One Is a Lotto Ticket

NEW YORK (TheStreet) -- Stocks sell off for many reasons. Among the most common reasons are reallocation of capital by elephants (hedge, pension, and mutual funds), earnings, and emotion.

The latest in-fashion reason to account for the decline in stock prices is the so-called fiscal cliff. I suppose the term fiscal cliff has a better ring to it than simply calling it what it really is -- the end of the party.

When it comes to a fiscal cliff or the end of the party I have good news and I have bad news.

The good news is there is little to make me believe we are about to fall off a cliff like Wile E. Coyote chasing Road Runner right now. Politicians are still able to take the easy way out and we can simply borrow more money to keep the band playing. America's AmEx Black card continues to charge ever-increasing amounts. Because it can borrow more, expect Washington to do so.

The bad news is the cliff is coming, and we will likely wish it was only as bad as falling off a cliff. With Obamacare just around the corner, don't expect a fast-improving economy. Even so, we likely have another five years before the Federal fiscal problem "really" has to be dealt with.

What does this all mean? It means forget about the fiscal cliff for now and focus on things you do have control over. For one, you can select stocks that are beaten up and ready to move higher.

The following are relatively unloved companies that I believe are about to outperform the market. PLCM Revenue Quarterly Chart PLCM Revenue Quarterly data by YCharts

Polycom ( PLCM)

Background: Polycom provides standards-based unified communications (UC) solutions.

52-Week Range: $7.45 to $22.34

Book Value: $8.03

Price To Book: 1.3

Shares are slowly but steadily climbing in the last 30 days, up 3% since about a month ago. Longer term, the shares have sold off and present a bargain for value seekers. The company is debt-free, earned about 32 cents in the last year, and is expected to see an increase for profit and revenue next year.

Best of all, the shares are on sale, trading about 20% below the 200-day moving average. I believe the moving average will get tested soon. Other than the key moving average, my technical analyst on the chart is bullish.

Seventeen out of 18 analysts are now rendering a hold recommendation. One recommends this as a buy, and no analysts recommend selling.

The average analyst target price for Polycom is $10.46.

The current proportion sold short based on the float is 8.2%, and I find this much interest by short sellers worth looking at in more depth. Short-sellers are the smart money, but they don't always get it right. I think they have it wrong this time.

PMCS Revenue Quarterly Chart PMCS Revenue Quarterly data by YCharts

PMC-Sierra ( PMCS)

Background: PMC-Sierra designs, develops, markets and supports Internet infrastructure semiconductor solutions.

52-Week Range: $4.63 to $7.80

Book Value: $3.06

Price To Book: 1.6

In the last month, the stock performed well with a 7.2% increase. Shares in PMC have lost about 8%, and now I believe it's oversold.

PMC is profitable but last quarter it took a non-recurring charge that wiped out the profit for the quarter. Next year it is expected to earn about 40 cents, putting the price-to-earnings at a bargain price of 13.

The company carries a small amount of debt, but also has enough cash to pay it off at any time. Adjusting for liabilities and discounting, it has about 40 cents per share in cash. The average analyst target price for PMC-Sierra is $5.81.

My price target is higher. My 12-month forecast is $6.02. I am not alone in my thinking with PMS; short interest is only 2% of the average trading float.

RSH Revenue Quarterly Chart RSH Revenue Quarterly data by YCharts

RadioShack ( RSH)

Background: RadioShack is one of the nation's largest and most trusted consumer electronics retailers in the United States and offers both on- and off-line shopping convenience.

52-Week Range: $1.90 to $11.84

Book Value: $6.66

Price To Book: 0.3

RadioShack was the classic yield trap. If you want to learn more about how to avoid yield traps, study the last two years of RadioShack's news, dividends, SEC filings and stock price history. I am including it here more as a warning, but the Shack did appear on my radar.

The shares already fell through the floor when the company canceled the dividend. The announcement sent the shares even lower.

The Shack is what I would call a "good news play." You buy this one with a good-till-cancel order in place at your target profit area. With a share price near $2, it's like an option without an expiration date.

The "lotto" play is to buy after a three-day dip, and wait (and hope) for good news that pops it higher by 20%-30% and you exit. You don't care what the news is as long as it moves the shares higher. This can take months to pay off; however, for $2 the odds are much better than playing the Powerball. I bought a (very) few shares with this in mind.

The average analyst target price for RadioShack is $2.46. The short interest is 37.1%. Any stock under $5 is usually a bankruptcy candidate, and this one is certainly included. Shorts are betting heavy on further declines in share price, but this actually helps make the case for considering a long position. If positive news hits the wire, many shorts will quickly cover, adding buying pressure.

Hopefully it's obvious, but this is a high-risk play that should either be brushed to the side, or bought only using high-risk capital.

DD Revenue Quarterly Chart DD Revenue Quarterly data by YCharts

DuPont ( DD)

Background: DuPont is involved in science and technology in a range of disciplines including high-performance materials, specialty chemicals, pharmaceuticals and biotechnology.

52-Week Range: $41.67 to $53.98

Book Value: $11.12

Price To Book: 3.9

DuPont currently pays $1.72 in dividends for a yield of 4%. The dividend payout rate is 52% of profits. I like DuPont for the yield and the discounted share price. Look to acquire shares under $43 for a long-term hold and sit back and collect the dividend until you're ready to sell.

The pendulum swings both ways, and in five or six years when the economy is in an upswing again maybe sell if warranted. The average analyst target price for Dupont is $51, and short sellers are not in a rush to sell shares short. Only 2.7% of the float is short. DD Payout Ratio TTM Chart DD Payout Ratio TTM data by YCharts

STX Revenue Quarterly Chart STX Revenue Quarterly data by YCharts

Seagate ( STX)

Background: Seagate Technology designs, manufactures, markets and sells hard-disk drives for enterprise storage, client compute and client non-compute market applications worldwide.

52-Week Range: $15.00 to $35.71

Book Value: $9.02

Price To Book: 2.9

Earnings Payout Percentage: 13%

Seagate is becoming one of the great value buys I look for. High-yield dividend of about 5%, and only 15% of profits are paid out. The company announced a dividend hike today, not a surprise considering the strong financial shape it is in.

The market is not allocating much weight to Seagate's strong income statement. Fears of a slowing PC market are weighing on shares. I believe the discount now offers an opportunity. Seagate is making the right moves and is a leader in storage.

The company has created the best of both worlds in storage. A combination of SSD with platters to create a product that is both fast and low in cost. If storage continues to move to the cloud, Seagate is well-positioned to exploit the sales.

If PC sales (or other products that use personal storage) pick up, Seagate wins. If not, Seagate continues with a focus on the enterprise. Either way, I expect Seagate shares to reward investors.

The shares have moved higher by 55% over the last 52 weeks. Analysts are calling for a price target of $28.76. I agree with a one year price target of $29 per share and over $30 two years out.

Short interest over 10% should give pause to investors looking at this company. The current percentage of the float short is 10.6%. There is a very good reason why I consider short sellers the "smart money" and RadioShack along with Seagate illustrate it perfectly. Unlike RadioShack, I consider Seagate a very good long-term investment.

I really like the options in Seagate. I am examining the January $24 strike put as the entry method. I want to collect at least $1.20 within the next week (Seagate stock likely needs to fall below $25 for that to happen).

If I sell the put option, and Seagate shares continue to fall, my cost basis is $22.80. I am very comfortable owning Seagate for less than $23 a share.

For non-option traders, Look for an entry near $24.75 as a relatively strong risk relative to reward play. STX Payout Ratio TTM Chart STX Payout Ratio TTM data by YCharts

At the time of publication the author had a position in RadioShack.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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