Sometimes, investors like to gamble when a stock is beaten down. Beaten down stocks can rally hard on good news, as prices are often depressed more than they should be. These rallies can sometimes be bolstered by short squeezes, as those who bet the companies' demise are forced to abandon their positions. It is not uncommon for a beaten down stock to rally 30%, 50% or even 75% off their lows. Today, I'm taking it a step further. I'm going to look at five names that have more than doubled from their 52-week lows. Since baseball season is almost here, I'm using baseball terminology for my title. Here are five recent doubles that could soon strike out.
The deals site will again be put to the test when the company releases fourth quarter and full year results Wednesday afternoon. Groupon is not known for its positive post-earnings performance, as you can see from the table below.
*Initial Q4 report. **After Q4 restatement.
Analysts are currently expecting about $640 million in revenues, which would represent a 26.3% rise from the year ago period. Analysts are looking for a three cent profit in Q4 compared to a two cent loss in the year ago period. Groupon guided to Q4 revenues of $625 million to $675 million, and operating income of $0 million to $20 million. In Q3, the company had operating income of $25.4 million, and had a slight loss for the quarter. Analysts are expecting a three cent profit in Q4.
Groupon shares declined a bit last Wednesday after competitor LivingSocial raised more than $100 million in a new round of funding. The new financing will ensure LivingSocial's near-term survival, providing more competition to Groupon for now. Recently, the founders of German deals site DailyDeal bought back the company from Google (GOOG), presumably for much less than the $114 million Google paid less than a year and a half ago. The European deals business has been very tough, something Groupon can attest to, since Groupon's international business has been very poor.
Groupon shares have rallied 120% off their 52-week low of $2.60, closing Friday at $5.72, with a recent high of $6.17. With the strong rally, Groupon will need a solid earnings report to keep shares elevated. Otherwise, we are in for another post-earnings plunge this week.
The streaming giant has seen a massive rally since its earnings report, one that has pushed the valuation way too high in my opinion. With Netflix, you are paying a significant premium on price to sales in relation to competitors Coinstar (CSTR) and Amazon (AMZN), as well as Apple (AAPL). We may have already seen the beginning of the stock's pullback, as we are down nearly $18 already from Wednesday's high just below $198.
Part of the reason for the recent selloff may be due to comments from ITG Research that Q1 domestic revenues were trending light. With Netflix's strong guidance for Q1 and shares rocketing 75% higher since the report, the company has to deliver in Q1. Additionally, opinions are mixed about the company's new show, House of Cards. The show cost an estimated $100 million, and it has yet to be seen whether Netflix will pull in enough new subscribers to make the venture worthwhile.
While some analysts are warming up to Netflix, including JP Morgan's recent price target hike, the average price target on Netflix remains below $134. Some analysts did not like the prospects of Netflix's bond issue, which raised $500 million. With content prices always on the rise, Netflix's free cash flow numbers have not been very good. The question going forward is will they need to raise more money for future content purchases? If so, how much and how soon? Netflix has rallied 240% off its 52-week low. How long that rally lasts will depend on how strong Q1 turns out to be.
The struggling phone maker is still 112% off its 52-week low of $6.22, but Friday's close of $13.18 is well below the $18.32 high we saw about a month ago. The stock rose into the BlackBerry 10 announcement, but has not done well since.
Recently, we've seen a number of negative analyst notes, which have helped drive down the stock. Deutsche's Brian Modoff is questioning early reports about sellouts. Deutsche found no sellouts in the UK, and noted that sellouts in Canada were attributed to low inventory. Mike Walkley with Canaccord Genuity echoed similar thoughts, and he reiterated a sell rating on the stock with a $9 price target. S&P's James Moorman was the next one to join the parade, cutting his estimates for three fiscal years. Moorman also has a sell rating on the stock, and cut his price target by a dollar to $12. Pac Crest's James Faucette believes that BB10 sales are well below street expectations. He believes that street expectations have gotten too far ahead of reality, and that there is no line of sight to profitability. The final note out was just last Friday, when MKM's Michael Genovese cut his rating from neutral to sell and price target from $12 to $10. He believes that there is a high probability that BB10 will flop, and that there's a 90% chance that shares go to $7.
That's five negative analyst notes in just 8 days, and I'm only going back to February 15th. There were plenty of other negative notes and reports during the first half of the month, including Home Depot abandoning roughly 10,000 BlackBerry devices for iPhones. We'll see how BB10 is doing in about a month, as the company is currently scheduled to report earnings on March 28th.
Green Mountain Coffee Roasters (GMCR):
It's been a few weeks since the company reported its fiscal first quarter results, so it's a good time to come back to the name. While the company beat on the top and bottom line for Q1, Q2 revenue guidance was a bit light, and that has caused the huge rally in this name to stall in recent weeks.
Green Mountain guided to Q2 revenue growth in a range of 14% to 18%. That was well below the 20.2% analysts were looking for, and analysts have now cut their forecasts to just 15.8% growth. This fiscal year's (ending September 2013) revenue estimate from analysts has been cut from 16.6% growth to 15.9% growth, and the following year's figure has been cut from 13.5% growth to 13.2%.
It is not a surprise that the stock stalled out in the mid to upper $40s. As of Friday's close, this stock was 166% from its official 52-week low of $17.11, and even more if you count the roughly $15.25 low we saw in an after-hours session after one earnings report. The recent high of $49.10 has marked a short-term top, and the stock hasn't traded above $47 since the day after earnings.
There are a few reasons why I believe this stock has stalled and may see $40 before going higher, several of which I touched in my Q1 report. First, this company bought back a lot of stock when they were in the mid $20s. I don't see them aggressively buying back stock with them now in the mid $40s. The second item was that the company had huge cash flow in Q1, but it was due to a few items that will reverse. The company saw its inventory balance drop, which is normal for the holiday season, but they will have to build it back up in a quarter or two. Additionally, they had a huge increase in accounts payable. Assuming that they will eventually pay those bills and restock inventory, cash flow numbers will drop during the second half of this fiscal year.
Green Mountain, like Netflix above, is a stock that investors can really only play quarter to quarter. One great quarter that sends the stock soaring can be good for a few months, but if the next quarter is poor, the stock will get hammered. Green Mountain did drop about 14% after this report, so gains can be wiped out quickly. Green Mountain's next report will be around May 1st, and it was that report last year that sent the stock down about 50% right away and nearly 75% before the drop was finished.
Sprint has been one of the better turnaround stories in this market over the past year or so, but the company is not out of the woods yet, and neither is the stock.
The first issue is if the Softbank deal does not go through. Sprint still carries an extremely large debt pile, and it is counting on that capital from Softbank to help pay back some of that debt. That Softbank capital will also be used to help build out Sprint's network, which still is well behind those of its rivals. Sprint is still losing billions of dollars a year, and if the company cannot complete the Softbank deal, it might be right to question the company's future. While results are improving, Sprint cannot win this fight on its own. While I think there is a high probability of the deal going through, there is still a bit of risk. Anything can happen, and Sprint's also got the Clearwire (CLWR) fight on its hands.
If we assume that the deal goes through, the other issue to think about is post-deal trading. Where will shares trade after this deal is completed? Could it be much lower than where we are now? There are so many complexities with this deal that it might just be a good idea to find another investment until everything is cleared up.
Sprint is currently up 153% from its 52-week low of $2.30. The stock is less than 25 cents from its 52-week high, and the upper $5 range has been sort of a ceiling lately. The stock hasn't broken $6.00 very often, but we've broken $5.60 to the downside a number of times. Sprint is in the midst of a turnaround, but significant risks remain.
All five of these names have seen significant rallies from their 52-week lows. However, they all face significant risks, both in the short and long term. Recently, it's been what goes down can easily go up, but investors have to realize that what goes up can also go down. Sometimes, if you miss a large rally, you have to just realize you missed it. It's better to walk away and maybe miss a slight rally higher than to try to jump onto the train at the top of the mountain.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.