5 Home Run Stocks on the Outs
05/22/2012 11:32 am EST
The market has been punishing these former favorites, but their businesses remain in tip-top shape, writes MoneyShow.com senior editor Igor Greenwald.
If you like confidence-inspiring charts, there’s very little to buy in this market. Despite yesterday’s rebound, 80% of the S&P 500 stocks remain below their 50-day moving average.
And while such widespread weakness has signaled good buying opportunities in the past, it most certainly does not insure against a retest of Friday’s lows, much less a 2008-style calamity.
Then again, there was nothing wrong with JCPenney’s (JCP) chart at $42 per share. At $26 a share, Groupon (GRPN) was the the most popular Internet IPO since Google (GOOG). Zynga (ZNGA) seemed to be on top of its game two months ago at $13 a share, based on the charts.
The charts are not a helpful leading indicator when recent action has been at odds with the fundamentals. Heavy reliance on the charts has had everyone driving by looking at the rearview mirror lately, and that was just as true when the market was melting up as it has been during the May correction.
We’re certainly not out of the woods: the recent selling has inflicted technical damage that will take time to heal. But buying shares in strong companies with excellent growth prospects in a heavily oversold market is the sort of risk-taking that tends to get rewarded over time.
I’ve been particularly drawn to smaller-cap stocks, because I want as little as possible to do with China and Europe, while maximizing exposure to the more promising US economy, and in particular its consumer and housing sectors.
And I’ve looked for secular growth stories, because they’re least vulnerable to the business cycle, fiscal fear-mongering and whatever other nonsense the election campaign may send our way. Here are five stocks this bottom-fishing has dredged up:
Select Comfort (SCSS)
I recently argued the bull case for this seller of premium mattresses, which currently has 5% of the market by value and less than 2% in terms of units sold...and yet recently posted sales and earnings increases of 35%. It’s a premium hyper-grower in a booming niche that should stay bouncy as the housing recovery progresses.
The stock is down 28% from its April high and 12% from the price a prominent hedge fund recently paid for a 5% stake. A better reason to buy is that the price is now less than 11 times trailing earnings before interest, taxes, and depreciation.
Pier 1 Imports (PIR)
It's down 16% from last month’s peak, and 8% since I recommended it too soon. But it’s a $1.5 billion retailer with expanding margins growing comparable sales 10% while selling for 14 times this year’s earnings, with the potential to prove much cheaper than that as the housing market starts to recover.
Michael Kors (KORS)
The fashion vehicle of the New York designer by that name, is nowhere near as cheap as Pier 1, but then again, it’s growing much faster.
It went public at $20 in December and now fetches double that, even down 20% since March. The stock’s fast rise was fueled by February results that hurdled expectations, delivering sales growth of 70% and a 40% income jump.
The stock had the misfortune of attempting a breakout into the teeth of the May sell-off, and then got really whacked when marketing partner Fossil (FOSL) warned of a shortfall. Kors watches have continued to sell well for Fossil. And, unlike Fossil, Kors is predominantly a US brand, so Europe’s struggles aren’t a major worry.
Same-store sales are growing by 38%, and revenue should continue to increase even faster as Kors doubles its North American footprint to 400 stores. Upper-middle-class and mass-affluent women in their 30s and, increasingly, 20s, can’t seem to get enough of the brand’s moderately pricey handbags and watches.
At 41 times forward earnings, Kors isn’t exactly cheap, but 70% revenue growth is rare and precious. Lululemon (LULU) is growing at “only” 50% and has a forward P/E of 34. It’s also priced at ten times sales, versus less than seven times for Kors.
Silicon Motion Technology (SIMO)
The Taiwanese fabless chip designer has been no slouch itself, recently increasing sales by nearly 50% while more than doubling earnings. But the company warned of weak memory card sales, even though these won’t keep it from meeting high estimates, or stop revenue from growing 20% to 30% year-over-year in 2012.
The stock is down 31% in the four weeks since that report, though it has nearly tripled since early 2011. The current price values one of the most promising designers of consumer electronics chips at less than eight times likely 2012 earnings.
This insurance software supplier fetches all of ten times earnings, having come out of nowhere over the last decade to put itself on the map as a legitimate enterprise cloud computing play.
It’s investing in an upgraded sales force while simultaneously giving up some revenue as part of its push toward a subscription-only model. As a result, revenue recently grew at a comparatively pedestrian 9%. And though cash flow remains robust, the shares have been dunked by fans of instant gratification.
But the well-regarded, heavily invested CEO is focused on the long run, and Ebix has been one of the fastest rising tech suppliers over the last three years, delivering average sales growth of 32%. I discussed EBIX in greater detail here.
All these stocks are clearly all in the penalty box at the moment, or were until Monday, when KORS (+8%), PIR (+5%), and SIMO (+8%) all made impressive bounces. But whatever the market does in the short term, the companies these tickers represent should continue growing sales and profits rather rapidly.
The charts will come around—they always do for winners. And when they do, we’ll long to buy at today’s markdowns.