Argus Research: Fallen Angels

07/18/2016 8:00 am EST


Stephen Biggar

Director, Product Strategy, Argus Research Corporation

In this report, we are taking a look at several stocks that have tumbled sharply recently from lofty levels, explains Stephen Biggar of Argus Research.

For each case study, we look to understand the drivers of the performance and whether or not the sell-off offers a buying opportunity.

Cavium (CAVM)

Cavium designs and markets multicore processor families that employ low-power architectures and that enable high performance and throughput with very low power consumption.

Cavium sold off by 10% on April 28th, 2016 after the company posted 2016 1st quarter revenue in line with expectations, but guided cautiously for the 2nd quarter of 2016.

We expect 2016 to be a big new product year for Cavium. But as we have warned, spending to support product development, customer acquisitions and volume ramps are impacting margins in the intermediate term.

However, we believe that Cavium is positioned for multiple years of above-peer-average revenue and profit growth as data center and cloud products gain traction and as wireless end-markets recover.

VeriFone Systems (PAY)

VeriFone is the global leader in secure electronic payment solutions at the point of sale. The shares plunged nearly 25% on June 8 after management projected weak second-half revenue and earnings -- due mainly to the delays experienced by smaller merchants in obtaining certification for new EMV payment terminals.

We view PAY as deeply oversold at 11.5-times our revised FY16 EPS estimate, a steep discount to their historical mid- to high- teens multiple. However, we expect them to rebound as the certification bottleneck clears later this year.

We do not view the current certification problem as a company execution issue. In addition, we believe that the sales have been delayed, not lost, as merchants continue to upgrade to EMV payment terminals in order to avoid chargebacks from card fraud.

Under Armour (UA)

Under Armour products have become popular with competitive athletes and consumers with active lifestyles.

The UA shares dropped recently after the company lowered its fiscal year 2016 and 2016 2nd quarter revenue and operating income guidance following The Sports Authority’s announcement that it would liquidate rather than reorganize.

In our opinion, investors have overreacted. We expect Under Armour to become a top global athletic brand based on its unique apparel, history of product innovation, and effective marketing.

The company also appears well positioned to become a leader in digital fitness products. That said, we caution that UA shares are likely to be volatile and thus suitable only for risk-tolerant investors.

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By Stephen Biggar, Editor of Argus Research

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