Last year I shared some analysis regarding big 2011 winners that stumbled as the year began. The six companies I discussed all rocketed in the following months, with five outperforming the market over the past year, so I decided to run a similar screen this year.
The thinking behind looking for early in-the-year fumbles is that often a company will suffer from profit-taking as the year begins. This can be due to tax-gain deferrals, though this might have been less than normal this year, but also window-dressing, which is when institutions hang onto winners so that they look smart when they report holdings.
Last year, my screen was a bit simpler, as I looked for stocks with $1 billion market cap that had dropped 10% in the first two weeks of the year but were still beating the S&P 500 over the past year. I changed it slightly this year:
- Down 3% or more YTD (S&P 500 is up 4%)
- Beating S&P 500 over the past year (>13%)
- No EPS estimate reductions over past three months
- 2013 EPS growth > 7% (S&P 500 EPS projected to grow 7%)
- Market cap > $1 billion
The main purpose of the additional parameters is to eliminate fundamentally deteriorating stories. There aren't as many big drops this year, which may reflect the accelerated tax-gain harvesting that took place. Note that many of you may wonder why Apple (AAPL) didn't make the list. Its exclusion is because earnings estimates have been coming down. Here are the 9 that did make the list:
The list is sorted from least to most in terms of YTD price decline. I have shaded in green the stocks with no net debt, with forward PE ratios below the market and with the current PE below the average of the past five years.
NetScout Systems (NTCT) is consolidating after taking out its all-time high from 2011. I don't know this company much at all. It describes itself as an "industry leader for advanced application and service assurance solutions", a network infrastructure company focused on packet-flow technology. On 1/17, it reported FY13-Q3 EPS and sales slightly above the consensus and gave guidance of 1.28-1.32 for the year compared to prior consensus of 1.28. Noble Financial downgraded them on Friday from Buy to Hold. The company has $3 per share in cash net of debt, which is about 1/8 of its market cap, but it also has substantial deferred revenue and a tendency to reinvest cash flow into small acquisitions.
United Foods (UNFI) is one that has captured my attention lately as perhaps the best way to play the trends towards organic and specialty food. The whole group has traded weakly to start the year after a great 2012. UNFI has a nice combination of top-line growth and margin expansion potential, but it is certainly not a value stock!
What a great stock Portfolio Recovery (PRAA) has been. I don't know this one too well either, but it has seen earnings increase ten-fold over the past decade. The company purchases consumer debt and then works with borrowers to create repayment plans - seems like a great industry these days! It announced a $115mm portfolio purchase in December of bankrupt claims.
Ulta Beauty (ULTA) began 2012 with a sprint and has flat-lined for the past three quarters. The company, which is the largest beauty retailer that operates 550 stores, shared an update two weeks ago, indicating 23% sales growth in the seven-week holiday period ending 12/29 (including 7.4% same-store-sales growth, which excludes e-commerce). The company affirmed its Q4 guidance it had shared in late November for same-store-sales growth of 5-7%, which accounts for some impact from Sandy.
Bank of America (BAC) is another great stock from 2012, especially following Labor Day, when it increased from 8 to as high as 12. The stock reacted poorly to its earnings report last week, but it doesn't seem like the outlook here is changing. To me, this looks rather technical, as the stock above its rising 50dma. With that said, the stock could pull back a bit further, perhaps to 10, but I wouldn't count on that. The stock trades below tangible book value, which has been increasing now for several quarters, though it slipped in Q4 by 1% to 13.36, up from 12.95 at year-end 2011.
Biotech Amgen (AMGN) shot up in early January but fell short of its December all-time high and had dropped sharply subsequently. On January 16th it shared some bad news about a Phase 3 trial of its key drug Aranesp, which didn't meet the primary endpoint in a trial that had been initiated in 2006 for heart failure. They also cut 2012 guidance by .10 to 6.40-6.50 due to a lack of the R&D tax credit (on 1/8). Despite its intention to spend $200mm for a new plant in Singapore, the company is planning to boost the dividend and accelerate share repurchases.
ANN Inc. (ANN), which operates Ann Taylor and Loft, isn't my favorite ladies retailer (I shared that one here), but it sure looks good from both a valuation perspective as well as technically. Jefferies downgraded the stock on valuation concerns on 1/2. I don't get it, as the stock trades at 12.5PE and just 5X EV/EBITDA. In November, the company's CFO took on the additional role of COO. Before joining ANN in 2007, he served in the same dual roles at Victoria's Secret.
Cyberonics (CYBX) is one I rarely hear much about - they continue to pioneer in neuromodulation, a medical technology that uses electrical signals to stimulate parts of the body (the vagus nerve, for treatment of depression and epilepsy, in the case of CYBX). I don't really see much of note lately, but the medical device sector has been on a tear lately, so the sideways action for the past several months looks interesting.
Sourcefire (FIRE) is one I looked at and missed in late 2011. What a tear! I was very impressed by this management team, which is focused on network security and has some great answers. The stock, which has been consolidating now for almost a year, may appear extensive at 45 PE or so, but it's worth noting over $5 per share in cash net of debt and projected sales growth of 20% in 2013. The stock trades at 6X sales and likely has some takeover premium embedded.
Hopefully my quick review of these nine stocks leads you to decide if it's worth investing more time. Last year, the stocks I highlighted as early-in-the-year fumbles proved to be a great source of ideas, one of which I added to my Conservative Growth model. Several of these seem like their pullbacks are mainly technical in nature, offering perhaps a good chance to get in to a solid long-term story.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.