The New Year marks a turning point in price action for many stocks. If a good, profitable company’s stock was oversold, it stays down through tax-loss selling season. Come January, everybody who was going to sell for a tax loss, has already sold, leaving nothing but buyers who will drive the share price up.
Such is the case with BorgWarner (BWA), maker of engineered automotive systems for power train applications. The stock price fell in 2015, as analysts made downward revisions on full-year earnings per share (EPS) estimates, which are projected to finish the year down 8.3% (December year-end).
Professional investors are now focused on BorgWarner’s full-year 2016 EPS, which are projected to grow 14.8%. That’s an attractive profit increase! In addition:
- The price/earnings ratio (P/E) is low in comparison to the EPS growth rate, at 12.9;
- the dividend yield is 1.2%;
- the company authorized a $1 billion share repurchase in February 2015;
- and the long-term debt-to-capitalization ratio is very low, at 16%.
BorgWarner’s P/E ranged from 11-24 in the years 2010-2014, reaching a P/E of 19 or higher in each year. If the stock reaches a P/E of 19 again in 2016, that would give it a share price of $64.98, giving today’s investors a potential 47% capital gain!
Based on chart patterns, I believe BWA will begin rising immediately in the New Year, barring any unforeseen bad news. There’s upside resistance at 55. As the stock approaches that price, I’ll be reviewing EPS, PE and pertinent company news, to determine whether the stock has the momentum to climb further in 2016.
BWA is an undervalued growth stock with a strong balance sheet. I’m adding BorgWarner to the Buy Low Opportunities Portfolio today, and I encourage you to buy at the current price. I believe the stock’s stabilizing process has completed, and that it’s ready to rise.
Rating: Buy.
