Earnings season has officially begun, and it is the perfect time to buy, both after a company underperforms despite strong earnings and also after a stock's trend is changed following a strong reaction to earnings. But also, there are underperforming stocks that could trade higher next week following earnings, or stocks in biotechnology that will rally following data. Basically, there is an array of stocks that could move for a multitude of reasons, and in this piece, I am looking at five such stocks.
Strong Earnings Look to Reverse Trend
After reaching new highs at $844.00, shares of Google (GOOG) had fallen back to the $760.00 range prior to earnings. Some had even considered that Google could become the next Apple, but after earnings, the stock is trading higher by 4.30% and I believe its strong quarter will reverse the trend.
Currently, there is a lot of speculation surrounding Google, whether it be Android, Glass, or self-driving cars, it is a company with a great grasp on technology and is at the cutting edge of innovation. During its most recent quarter, the company saw year-over-year (YOY) revenue growth of 31% (22% excluding Motorola). The company's CEO, Larry Page, confirmed Google's "big bet" mentality and the company's "AdWords" revamp is seeing a great deal of support. Most importantly, the company looks to be finding solid ground with advertising and the shift to mobile, as paid clicks rose 20% YOY.
When you compare Google to the other technology leader, Apple, you realize that Google is a much more expensive stock. However, the company also has a clear vision and fewer questions surrounding its future. In addition, the stock has "flipped the trend" and has now reversed back towards $800.00. Therefore, with this change in sentiment, caused by fundamental catalysts, I'd watch Google closely next week for continued gains and a trend above $800.00.
Despite Gains, This Stock is Still Nowhere Near Fair Value
At this point, I am calling for gains in Rite Aid (RAD) until the stock gets closer to $3.00. It is now trading at multi-year highs with no resistance in sight, although I assume there will be some psychological resistance near $3.00. Currently, the stock is presenting, what I believe, the clearest value in the market, now profitable after years of inefficiency.
In 2013 alone, Rite Aid has rallied 72%, including 30% since April 10. The reasons for these gains are fundamental improvements, not technicals or speculation. Back in Q3 the company posted its first profit in more than four years, and then after its Q4 earnings, the company had achieved full-year profitability for the first time in six years. The company is now crushing all of its own expectations with bottom line guidance. Yet because the company is so large, its operating margins are still just 2.83%, far below its larger competitors.
The reason for Rite Aid's sudden boost in fundamental performance is both changes made by management to restructure the business, but also a shift to generics in the space, which also carry higher margins. My belief that the stock will continue to rally is based on the fact that despite large gains it is still trading with a price/sales ratio of just 0.08. This is due to many years of underperformance. Meanwhile, Walgreen and CVS trade at valuations that are more than seven times more expensive, yet all three companies are now profitable. As a result, I expect Rite Aid to trade higher regardless of the market. I think it will now correct after years of underperformance to account for the fact that the company is profitable; and might I add, there is speculation of a takeover. Of course, there will be pullbacks along the way, but with such an incredible quarter, watch for gains over the next three months as more and more investors catch wind of this great comeback story.
Expecting an End to This Pullback
If you like comeback stories, then you'll love what Best Buy (BBY) has to say. The company has seen its valuation increase almost 100% in 2013 alone, and much like Rite Aid, this was due to years of underperformance, the stock being oversold, and presenting clear value to its peers.
Back on April 3, the company created buzz when it announced a plan with Samsung to create mini-stores inside its "big stores" for Samsung products. This includes 1,400 mini-stores and is the start of a new-look Best Buy. Personally, I love the story, and the 14% gains that the news created. I also like that sales have been consistent and that a new sales tax for online retailers could bode well for Best Buy. However, I also said on many occasions (on Twitter), that because of its large gains investors should expect a pullback. Since April 9, that pullback has occurred, and I believe that after last week's stabilization, gains will now continue.
I am not a technical investor in the least bit, I am a fundamental investor, but Best Buy is a stock trading at just 0.16 times sales with a forward dividend yield of 3.00%! The company continues to see its float decline in a number of shorts. Its value, specifically price/sales ratio, is far cheaper than the competition and because of recent gains, its slight pullback, and now stability in shares, I'd watch for a continued rally, as I believe fundamental investors are simply waiting for good times to jump in on this stock.
An Under-the-Radar Biotech Stock to Watch
Now that we've looked at three big name companies, let's go a little under-the-radar, with a healthcare company called Theravance (THRX). If you haven't heard of this company, then take notice and be prepared for large gains.
The $3.2 billion company is a clinical-stage biotech that saw gains of 16% on Thursday of last week. The company's valuation rose after an FDA panel recommended the approval of its once-daily COPD inhaler "Breo Ellipta", also called "Relvar" in the U.S. The reason this is significant is because the COPD market is massive, estimated at $11 billion last year. After its approval, Theravance's drug, Relvar, will compete directly with AstraZeneca's drug, Symbicort, which returned $3.19 billion last year. Theravance is actually partnering with GlaxoSmithKline, but receives the majority of the revenues earned on product sales. As a result, this is a $3.2 billion company, with a multi-billion dollar product on its hand, and an impending launch.
Due to the factors that I just laid out, I consider Theravance a "can't miss stock." Not only does it have a potential blockbuster and close ties to big pharma, but also a very strong pipeline including a Phase 2b product for gastrointestinal pain associated with opioid therapy, and an antibiotic medication for bacterial infections. Over the last year, we have seen a number of big jumps in biotechnology, including Sarepta Therapeutics, Celldex Therapeutics, ACADIA Pharmaceuticals, and Repros Therapeutics. Almost all saw large gains followed by a period of consolidation just prior to continued gains. I expect Theravance to continue the same trend, as it pulled back on Friday. So look for continued gains next week as the market reconsiders the upside that is present.
A Small Cap High-Flying Idea
Theravance was an under-the-radar company, but not near to the same extent as Consumer Portfolio Services (CPSS), which is a $185 million financial company in the automotive space. In one-year alone, this stock has rallied 480%; yet during the month of April, has pulled back to post losses of 25%. Yet with the company reporting very strong earnings on Wednesday, I'd watch for this trend to reverse rather quickly.
Consumer Portfolio Services is the perfect example of two important points for retail investors: First, don't let performance dictate your assessment of upside and second, don't let post-earnings reactions dictate your opinions of a quarter. CPSS actually traded lower after earnings on Wednesday and Thursday (by double digits), yet this was following a very strong quarter.
For the quarter, Consumer Portfolio Services exceeded bottom line expectations by a small margin, yet with revenue of $54.6 million (growth of more than 20%), it exceeded the consensus by a mindboggling $22.5 million! In addition, this is a company with upside tied to its managed portfolio and contracts purchased. For the quarter, CPSS grew its managed portfolio by more than $70 million and purchased $180 million in new contracts.
Aside from a strong quarter, and large one-year gains, the stock is still cheap. Currently, the stock trades at just one times sales and just 7.00 times next year's earnings. Therefore, with all things considered, I can't find a reason that the stock traded lower, other than it being an incorrect trend. On Friday the stock rallied more than 6%, and after a month full of losses, I would watch this stock closely and expect a massive run higher next week as investors start to take notice.
In this week's "Five Stocks to Watch", I gave you a little bit of everything. However, as a fundamental investor, the suggested upside for these stocks is based on long-term trends and my belief that each stock is attractive over a period of time. I urge you to explore your portfolio and also to assess stocks following earnings or other catalysts. I think you'll be surprised to find the level of value that is scattered throughout the market. Then, simply react, invest in value, and return gains regardless of market conditions.