Always on the lookout for the best deals in the market, I like to start with the month's biggest decliners to see if the market has overreacted in any way, selling off a company that does not deserve it.
There are always some interesting opportunities, but last month presented some especially interesting contrarian plays.
What's on offer?
First up, down 4.5% during the past month is Visa (NYSE: V ) . The company has been sold off due to concerns that the restrictions on card fees in Europe will hit it hard -- harder, in fact, than MasterCard, as Visa has a larger exposure to the debit card market. These concerns are valid, but there is much more to Visa than card activity in Europe.
Visa has many more cards in issue than any of its peers, and the company processes a lower average transaction value. This means the company in general generates more revenue. In addition, Visa controls about 58% of the cards in circulation worldwide.
The factor I'm most excited about is Visa's exposure to Africa and Latin America, two key areas of global growth. Visa is active in Africa, announcing a partnership at the end of 2011 with the Rwandan government to help electrify financial services. The company also has operations in South Africa, and it recently launched the AFRICARD, a Visa-branded prepayment card valid throughout the whole of West Africa.
Growth in Africa and Latin America, not to mention more transactions in the Western world as the globe pulls itself out of recession, will certainly offset any fall in revenue brought about by a cap on transaction fees. With a squeaky-clean balance sheet and a highly cash-generative business model, this pullback makes Visa look attractive no.
Homebuilders are out of favor
Giving up all of its yearly gains and heading back to its 52-week low is PulteGroup (NYSE: PHM ) . Homebuilders in general have been shunned in recent months after the spike in mortgage rates scared investors, hitting demand for new homes. However, all is not lost. The country's average home price is now at highs not seen since before 2007, and supply is now surpassing demand in the market. Hang on, this is usually considered a bad sign, right? No, not in this case.
The previous shortage of homes on the market was causing fears that this would elevate prices too much, causing a bubble -- bubbles usually pop, which is a very bad situation. A more sustained increase in prices equals a strong market with less bubble-like tendencies, which is better for the longer term, even if investors shun housing stocks in the short term.
PulteGroup's 37% decline from its peak in May presents a good opportunity for savvy investors, in my opinion. Home prices remain elevated, and a more sustained recovery in the housing market is underway. The company has been proactive during the past few months, increasing cash, paying down debt, and expanding shareholder equity by 20% year on year.
That said, analysts have downgraded earnings estimates over the past two months. Predictions are for the company to earn $1.20 per share on average for this year; still, that is a forward earnings multiple of 13 -- hardly expensive for EPS growth of nearly 100% time year.
The dog of the group
Unfortunately, I am less positive on my third decliner, Seagate Technology (NASDAQ: STX ) , which is down 3% over the past month -- this, after the company reported dismal EPS results of $1.20 per share, beating estimates but falling 50.2% year on year. Revenue also collapsed 23.6% to $3.4 billion.
Previously, I was positive on Seagate. The company looks undervalued when compared to the rest of the market, trading at an earnings yield of 11.7% versus a market average of 5.2% and the Treasury yield of 2.6%. However, Seagate's management noted on the conference call that the company is currently working through a period of "uncertainty and opportunity," and adding: "Looking ahead, we believe the market trends of data growth driven by cloud, mobile and open-source advancement will present new and significant opportunities for Seagate."
These are factors that could significantly affect Seagate's outlook, and with earnings falling as rapidly as they are at present, I want to stay away. In this situation, a company that currently looks undervalued can quickly become overvalued.
Having said that, Seagate is still cash-generative, and the company's free cash flow was $2.2 billion during the second quarter -- approximately 236% of gross income. This allows the company to buy back both stock and debt without digging into cash.
These three plays all offer some interesting objectives. Visa is a no-brainer: The company is swimming in cash, and the restrictions in Europe will not hamper global expansion, which I believe is worth significantly more. PulteGroup is now a longer-term play. The hot money has left the company, presenting a good chance for investors to buy in. Finally, Seagate is an odd one, but the cash generation is good, and if the company can recover, it will be profitable. That said, the current outlook does not look promising.
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