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One Bank to Thrive After Easing Ends: Analyst

Investors are throwing a tantrum as QE2 (quantitative easing) unwinds.

The hurdle for a third round of monetary-policy easing is very high, according to Fed officials, especially given the recent run-up in commodities. So, the summer may prove a challenging time in the equity market as Congress weighs austerity measures and the central bank ends its record Treasury purchases.

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Consequently, it may be an ideal time to buy stocks, as many may fall to attractive discounts.

Three stocks that have been underperformers, as of late, but still offer outstanding long-run growth prospects, are outlined below. These equities may rally if growth picks up and the economy can maintain a pace of improvement, without support from policy makers.

One is an energy investment, one a carmaker and the last a financial company. These stocks are down sharply, but offer attractive long-run prospects.

3. First Solar makes thin-film, cadmium telluride solar panels. It's a cost leader.

First Solar shares have gotten whacked in 2011, having fallen 8.1%. The stock is down 32% from its 52-week high, but has retained positive rankings from analysts, receiving "buy" ratings from half of those in coverage. Goldman Sachs is particularly bullish on the stock, proffering a six-month target of $190, consistent with an outsized gain of 59%.

Goldman, impressed by the company's 13-cent first-quarter earnings beat, expects the stock to continue to decline in coming weeks as the market prices in a slowing market in the second half of 2011, presenting a buying opportunity to savvy investors.

With QE2 ending, growth equities, such as First Solar may endure heavy selling, though the fundamental story remains intact. During the past three years, sales, net income and earnings per share have grown 59%, 45% and 41%, annually, on average. Higher global energy prices may assist this stock.

According to Goldman, cost cuts are under way, and "tracking on plan for First Solar, less so for competitors and are allowing for ASP declines, larger markets and fewer competitors."

The bank expects significant multiple expansion as interest grows in solar, helped by elevated crude prices, rising energy demand, and recent interest from external players. The purchase of SunPower by Total , may be a tell of future acquisitions.

2. General Motors has fallen 21% in 2011 and 14% since it went public in November.

The Financial Stock Pick

The carmaker has delivered solid operating metrics and impressive international growth for the past two quarters, but its stock can't generate much momentum. The equity currently costs an enterprise-value-to-EBITDA multiple of 3.9 and a free-cash-flow multiple of 4.7, 52% and 74% peer discounts. The analyst sentiment for GM remains positive.

About 74% of researchers in coverage advise clients to purchase shares and 26% recommend that they hold them. A median 12-month target of $42.67 suggests that the stock is universally considered undervalued as that mark suggests a 46% advance.

When GM filed for bankruptcy, its bondholders and stockholders were essentially wiped out, but the new GM has a claim on their losses, which allows it to avoid taxation. Its NOLs, or net operating losses, may allow GM to shield anywhere from $14 billion to $19 billion of its profit from taxes, helping its stock's outlook.

Also, if online financial Ally, made up of former GMAC assets, goes public, GM will garner the proceeds. However, concern about a sale by the U.S. government, which currently holds about 35% of shares outstanding, is keeping investors on the sidelines.

1. Citigroup has gone from darling to dog rather quickly. Among the hottest stocks of 2009, Citigroup more than tripled from its March 2009 low and then rallied 43% 2010. It has dropped 16% in 2011, though other financials have also lagged. The Financial Select Sector SPDR has fallen 4.4% in 2011 as the S&P 500 gained 3.6%.

Still, Citigroup is gaining momentum.

But, the stock's largest advocate group, hedge funds, may have altered their thesis. Hedge funds' aggregate position in Citigroup decreased 24% to 202 million shares last quarter, as David Tepper's Appaloosa Management, Lee Ainslie's Maverick Capital and Louis Bacon's Moore Capital Management significantly reduced their stakes in Citigroup. The selling may be premature. A rebound was manifest in Citigroup's latest quarterly report.

The bank's adjusted first-quarter earnings per share dropped 29% to $1, but exceeded analysts' consensus earnings forecast by 10%. Revenue, down 22%, missed consensus by 4%, but the shares stagnated in response to the report. Citigroup is still whittling down to core operations, selling assets from Citi Holdings, its "bad bank" counterpart. The sell-side has a favorable view, awarding the stock 20 "buy" recommendations, seven "hold" calls and three "sell" ratings. A median price target of $56.17 suggests a potential 12-month return of about 41%.

JPMorgan values Citigroup at $65, suggesting the stock will rise 63%. It likes Citigroup because of "shares trading below tangible book level, strong capital levels, sizeable amount of loan loss reserves, and potential for faster growth from emerging markets."

As it sells non-core assets from Citi Holdings, Citigroup will offer greater leverage to emerging markets growth. The bank recently reinstated its quarterly dividend and, at 7.4-times JPMorgan's 2012 earnings estimate, shares are quite cheap relative to the market.

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