A little more than a month into the year, the S&P 500 is up 6.1% in price despite its largest member falling 14.8%. As is always the case, there are winners and losers. When the biggest stock is the biggest loser, though, it leads to lots of winners, and this is certainly the case: 292 (58.4%) of the stocks in the S&P 500 are up 6.1% or more.
Remarkably, seven stocks in the S&P 500 are up 30% or more. While it's not likely that any of these seven will rally 30% each month the rest of the year, some may continue their advance, while others may represent profit-taking or short-selling opportunities.
The list is sorted by year-to-date return, and the data are from Baseline. What's interesting about the list to me is how most of the names are relatively inexpensive on a EV/EBITDA basis - I highlighted the ones below 7X in green. Most of the names trade at reasonable PE ratios and certainly below their average for the past five years. Only one stock has a lot of debt, and I highlighted it in yellow. I also highlighted the heavily shorted names. Before I share a few thoughts on each of the names, I want to point out that none of these names are on my watchlist.
Netflix (NFLX) has had a great year for most stocks in the past month. Their earnings report was the catalyst, and it didn't hurt that there were a lot of shorts. The stock exploded because the risk of failure in their streaming strategy abated, as subscribers grew. While the company doesn't have a lot of debt, it does have huge commitments for future content purchases. Domestic streaming subscribers grew 25% to 27mm in 2012, and there are now 6.1mm international streaming customers. At year-end, the company had $200mm in debt and $200mm in convertible debt, and it priced $500mm 8-year notes yielding 5.375% in January, $225mm of which will be used to redeem the 8.50% of 17. The issue, though, which is highlighted on page 31 in the 10-K, is that there is over $5.6 billion in streaming content obligations beyond this debt, most in the next three years. The company needed to grow subscribers, and it did in Q4, adding 2mm sequentially. Still, the company doesn't appear to be in the clear to me. I think that this is likely an overreaction and note that the recent 175 top lines up well with former support and resistance levels from late 2010, suggesting a pause. I like rival Coinstar (CSTR), which I detailed recently when looking at heavily shorted stocks.
Best Buy (BBY) is one I missed in late November when I was looking at beaten up stocks starting to bounce. While my screen did a great job of picking it up, and I did call a trade to the $14.50-16 area with potential risk to 12 when the stock was trading near $13 (and it ended up dropping to as low as $11.20), I couldn't get too confident. At this point, I think it comes down to the likelihood of its founder successfully buying the company, and that's not something that is easy to predict. I think a lot of capital came into the market after the new year looking for ideas like this, but the easy money was likely made.
I feel similarly about Dell (DELL), as the highly publicized take-out talk has moved the stock to a level that offers likely only limited upside from here. A recent Reuters article indicates $13-14 as the most likely price, and this makes sense given that Michael Dell needs to buy stock to have a controlling equity of the LBO.
Boston Scientific (BSX) is a nice turnaround story. While the stock may be ahead of itself, I can see this one playing out well. Their new CEO, who came from Johnson & Johnson (JNJ) but had to wait due to a non-compete, is much better suited than his predecessor, who excited investors at the time but never had any traction during his short tenure. While Goldman reiterated a "sell" with a 5.20 target going into their report last week, the company surprised on the top-line, gave pretty reasonable guidance, announced some more restructuring and authorized $1 billion in shares repurchases. The company also made a very interesting acquisition recently of Cameron Health, which offers a unique subcutaneous ICD. While at 7.64 the stock may seem like it is up a lot after the 50% rise off the lows, keep in mind that it traded above 45 in 2004 before it was hit by a series of problems.
Life Technologies (LIFE) is another take-out candidate. The company, which used to be known as Invitrogen, is apparently in talks with private equity firms and Thermo Fisher (TMO). It hired strategic advisors to assist it, so this sounds quite real, especially after all the excitement with smaller rival Illumina (ILMN) and Roche. The talk has been as high as $80 from what I have read, and this level doesn't look insane to me.
Valero Energy (VLO) began 2012 with a big jump as well, and it ended substantially higher for the year after a big correction from March into May. This year's move began with an announcement at the GS Global Energy Conference on January 8th that it would separate its retail segment by early Q2. It also announced reduced capital spending and a focus on returning cash to shareholders through dividends and repurchases. The move accelerated last week after they reported very strong results for Q4. To me, the stock looks cheap and without much chart resistance until $50, so I wouldn't fade this one yet.
Finally, Pitney Bowes (PBI) captured my attention in late November, when I included in "The 20 most oversold stocks in the S&P 500". I pointed to its high debt load at 3.5X projected 2013 EBITDA, but I pointed to the massive short-interest and sky-high dividend that represented about 50% of free cash flow. Well, bulls won here, at least for now, as the company maintained the dividend after projecting FCF of $600-700mm and providing guidance in line with the consensus for 2013. One thing that makes this one very interesting is a new CEO who joined after a long and successful career with IBM. I want to look more closely into this one, as my technical read is that the future range is $13-18, suggesting that the current price may still be a good deal.
I have shared my thoughts with the caveat that I am not really plugged in closely to any of these stocks. Several seem to be bets on M&A (BBY, DELL, and LIFE), while NFLX and PBI look to be fueled by short-covering. BSX and VLO appear to be fundamental improvement stories. Finally, PBI and BSX have new CEOs, which can be an important source of value creation.