For the last few weeks, I have been looking at five stocks with catalysts and movement signaling a trend higher. With earnings season in full force, there is a lot of value spread throughout the market, as industries trade higher or lower following earnings reports, and investors race to value a market that has been inconsistent, to say the least. In my opinion, there is an array of stocks that could shortly make gains for a multitude of reasons, and thus I continue my weekly installment by spotlighting five stocks that could move in the week ahead.
Has a Bottom Been Found?
Look, I know that any selection of Apple (AAPL) to rise will be viewed as just another useless call regarding an unpredictable stock. I'd be the first to say that at this point Apple is impossible to predict, trading with a mind of its own. But with that said, the much feared FQ2 earnings report has passed, and with all things considered, the quarter wasn't that bad.
Personally, I am not too concerned with Apple's 11% growth, 37.4 million iPhones shipped, or its margins. But what I am concerned with is its 15% dividend boost, its decision to boost its capital return program by $55 billion, its upcoming product line, and its valuation relative to its competition. While I don't know what "exciting new product categories" the company will create, I do feel confident that, as investors look at the entire picture surrounding Apple, new money will flock to the stock.
Apple is now paying a 3% yield, buying back a ton of stock, and has new product announcements in the coming months. In my opinion, the stage is set, and the speculation of bad earnings has passed. Last week the stock rose from $390 to over $410, and while this could be a "head-fake" (as we've seen many false rallies), I do think that it's highly likely the stock rebounds until it finds an appropriate trading range. When you look at Apple compared to Microsoft in terms of valuation and growth, it's fair to suggest that this trading range should be greatly higher, and after last week's gains, that upside could continue next week.
After Finding a Range, it's Time for a Breakout
In various articles, including last week's "5 Stocks", I discuss the natural progressions of a stock following great earnings (or after good data in biotechnology). First, it pops. Then, it pulls back or finds a trading range. And finally, if earnings are really strong, it will breakout even higher. The last part is where fundamental investors can make a significant amount of money, and in this category, I expect Restoration Hardware (RH) to join my list of calls that pop once more after a large post-earnings rally.
Restoration Hardware is a $1.5 billion company that you've probably never heard of (unless you are a furniture/home design enthusiast), as it trades with volume of just 152,215 on average. However, it is a great company, one that is performing with fundamental perfection, and that operates in the same space as Wall Street favorite The Home Depot (HD). It is a small company, with just 71 retail stores, but during its last quarter, saw a 30% growth. In fact, comparable store sales rose 26% YOY, which is greater than any other retailer in the market with equal sales.
After posting its great quarter, the stock has increased almost 12%, and the point that I can't get passed is that it has not increased its store count. The stock is now trading at 24 times next year's earnings, yet trades at a 30% discount to competitor The Home Depot in terms of sales/valuation. Obviously, with 30% growth compared to The Home Depot's 2% growth, Restoration Hardware is worth a much higher multiple. When you incorporate the fact that Restoration Hardware is now looking to add more stores and is exploring 20 different markets, then this is a stock that could skyrocket. While it is very difficult to predict the timing of a second post-earnings pop, I do think that after five trading sessions, it will begin at some point in the coming week.
Speculative Yet Promising for Short-Term Gains
Last week, I was wrong with my small cap choice (only wrong of the week), Consumer Portfolio Services (CPSS). Therefore, I wanted to look deep within the small cap space for my selection, and it took me to OncoSec Medical (OTC:ONCS). Just to be fair, this is a stock that I personally own, at a very small position, and since my position it has traded higher by about 20%. And the reason that it's higher by 20% is the reason that I am adding it to this week's list of stocks that "could" jump next week, which is data.
OncoSec Medical is a very promising company, one that is developing two different platforms using what's called the OncoSec Medical System (OMS) to treat cancers with both chemotherapy and immunotherapy. The upside lies in the immunotherapy approach (ImmunoPulse), which is being tested in three studies with the largest being melanoma. In a previous Phase 2 study, results were flawless, as 38% of patients showed a partial or complete response at six months, with treated lesions responding great to the therapy. However, we must keep in mind, that although these results were very good, the data was tested on just 25 patients and with no control arm, meaning that more telling results will be seen later.
I should note that I am not predicting that OncoSec's ImmunoPulse will or won't be brought to market after a larger trial. I think it is promising, and that by using IL-12 (which is a highly effective, but somewhat dangerous immunotherapy) OncoSec has a great shot at success; the ImmunoPulse platform requires smaller doses due to the electroporated cells, thus eliminating side effects. What I am predicting is anticipation and excitement ahead of data, which we saw twice in 2012.
Last year the company announced positive interim results from its Phase 2 study using ImmunoPulse to treat both metastatic melanoma and Merkel cell carcinoma (MCC). The results from the study, although small, were incredible, and it's from that trial that we will be seeing results next month (in May at ASCO). Now, the reason I think it could rise is because last year the stock rallied 150% during the six weeks prior to data, and already we have seen the stock rise 25% in recent weeks. Just to be fair, I don't know if this will happen again, but the signs are present. It occurred twice last year, and with this study being complete, I think (the anticipation of) positive data will cause ONCS to rise and stay higher.
See Larry Smith's coverage on ONCS for a complete look at ONCS including the risk and reward.
An Incorrect Trend that Could Reverse
Alcatel-Lucent (ALU) has been my greatest single defeat as an investor. Every time I call for it to rise, it trades flat or falls. Therefore, my decision to call a rally might be a bad sign, and rightfully so. However, as I look at the company's quarter, it wasn't that bad. Sure, the company saw its fourth quarterly loss in a row, but beat top line expectations by 50 million euros, producing growth of 0.6%.
I'll admit, there's nothing pretty about Alcatel-Lucent. It is a near zero growth company with low margins that is undergoing a restructuring process. However, that restructuring process created gains of 75% towards the end of last year until February 2013. It now seems as though the market has forgotten, which leads me to believe that now is the perfect time to buy.
Here's the good news: The company's largest segment, Networks & Platforms, grew by 4.20% YOY; the company announced plans to unveil the details of its strategic review by early summer; and on Wednesday it completed its first sale since the restructuring process began. In some ways this quarter reminds me of an earnings play from back in 2011. In my book I called this "The HOG Effect", because it related to Harley Davidson (HOG) and an investment after the stock had traded lower despite strong earnings. To make a long story short, I initiated a large position in Harley Davison at $35-ish after the stock traded lower (post-earnings), then sold it for a 50% gain. My theory, which I often test, is that the market responded illogically to earnings based on the valuation of the company and, that upon further consideration, bought on the weakness.
I think we could see a "HOG Effect" post-earnings rally following a disappointing initial reaction to Alcatel-Lucent. The stock trades at just 0.17 times sales, meaning it's not like there were high expectations. Then, when you incorporate the speculation and excitement surrounding its restructure and the sale of assets, there could be a push on the stock. While this is admittedly speculative, almost all post-earnings trends are psychological and/or speculative. The good news is that there are fundamental positives to take from the quarter, and the stock was already priced for a worst-case scenario.
After A Long Downtrend, this Stock Looks Ready to Pop
My final selection was a tough choice, and I thought hard about going with Seagate Technology (STX). The stock traded higher throughout last week and then also on Friday despite a lower market, following strong earnings by Western Digital (WDC). Typically, these two stocks trade in tandem; however upon further research, I was very concerned with Western Digital's increase in market share to 44.40% from 43.6%. If Western Digital's share is rising, then it's possible that Seagate's is declining. So instead, I decided to go with the troubled company Amarin Corporation (AMRN).
After a six month 45% decline, shares of Amarin Corporation rallied 6.50% on Friday after the company announced that the FDA accepted its NDA for Vascepa to treat patients with high triglycerides (with mixed dyslipidemia). The company was once a biotech darling, but has since seen the peak sales expectations for its drug, Vascepa, decline from $2 billion to $1 billion, and now $500 million. Currently, the drug is approved to treat those with high triglycerides at 500 mg/dL. If approved for this new indication, the drug could be used on patients with levels between 200 and 499 mg/dL, which the company estimates to be one in every five U.S. adults.
The large investment opportunity for Amarin has always been if Vascepa was approved to treat patients with triglycerides above 200. With its current indication, sales could only reach $500 million, but with the new indication, it might not be far-fetched to suggest revenue of $1.5 billion. The key for prospective investors is that Amarin is now cheap, trading with a market cap of only $1 billion. In biotechnology, this is rare for companies with newly approved products, as most trade at a level around two times peak sales; and then once sales are produced, this ratio typically increases to a level of five to ten times sales. While I am not prepared to say that sentiment has been shifted for Amarin, I do believe that, because of its sharp decline and its large sales potential relative to valuation, upside exists. Hence I would watch it short-term for a further breakout, especially if it surpasses $7.
In this week's "5 Stocks to Watch", I tried to give a little bit of everything for everyone. 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.