There are many who believe the markets are about to enter a period of consolidation, while others think that last week may only be a break before the next push higher. Either way, I continue to believe that now is the time for value. In this week's installment of "5 Stocks To Watch For Gains Next Week," I am looking at stocks that I believe present a great level of value and could outperform the market over a longer period of time.
Shorts Running for the Door as This Company Continues to Outperform
After announcing earnings, SodaStream (SODA) traded lower by 6% on very strong quarterly results that beat expectations. In the quarter, SodaStream grew 33.90% and then raised its full-year revenue guidance to expect growth of 27%. The stock has since traded higher, and has returned gains of 65% during the last year. However, I still think it's a buy, and the reason is because the stock has traded flat for so long that now it is way too cheap.
The big question in the minds of investors was regarding U.S. growth, as investors wanted to see more market share in the U.S. SodaStream answered these questions with authority, by posting year-over-year growth of 89% in the U.S., and is fast-approaching a 50/50 revenue share between Europe and the Americas.
As I said earlier, despite this growth SodaStream is cheap. The stock currently trades with a price/sales ratio of 2.63 and a forward P/E ratio of 18.68. Some bears might say those ratios are expensive; however, compared to the S&P 500's price/sales of 1.50, P/E ratio of 17.0, and its fundamental growth of about 3%, SodaStream is really cheap. As of April 15 the stock had 45.20% of its float being short, meaning there is a lot of room for short covering. This is a stock that has always been attached to the performance of Green Mountain Coffee Roasters (GMCR) although it shouldn't be, and there now appears to be a market-wide sentiment shift. Thus, I expect further gains and for SODA to quickly trend above all-time highs.
A Favorable Trend to New Highs for This Cheap Stock
After Rite Aid (RAD) posted a quarterly profit in December, and I have been heavily invested in the company ever since, starting at $1.20. Since then, the company has posted its first year of profit in more than six years and is guiding for significant bottom-line improvements in 2013. While I have expected a broader pullback after the stock reached $2.68, it now looks as if investors are buying at $2.50, not letting it fall below that point. The stock is now slowly but surely starting to reverse, and I think it will soon retest highs of $2.68 and break into a higher level over $3.00.
There are many people who might think I am crazy for "expecting" a six-month 300% gain in shares of Rite Aid, but the truth is that those people don't know the RAD story or how far it has come. Nor do they realize that RAD would still be far cheaper than its larger competitors. The stock was pushed lower for years due to inefficiency, but now -- thanks to the patent cliff in biotechnology -- prescription volumes and margins are significantly higher. Rite Aid is a massive company, it has but a 0.47% profit margin but produced net income of $107.47 million last year.
Its two larger competitors have an average profit margin of 3.10%, thus allowing much room for improvement. Furthermore, Rite Aid trades at just 0.09 times sales, significantly cheaper than the 0.60 times sales seen by the two industry leaders. Therefore, a $3.00 price target is not unreasonable. In my opinion, a $5.00 price target isn't unreasonable, as Rite Aid would still be trading at a deep discount to its peers. Thus, with the company now seeing a bottom at $2.50, I would watch it closely for a rapid turnaround and the continuation of its uptrend.
This Small-Cap Looks to Have Found a Bottom
My last few small-cap selections have seen both ups and downs. Last week, I chose XPO Logistics (XPO) ahead of earnings and it traded lower. I've also chosen Consumer Portfolio Services (CPSS) after a strong earnings report where it fell lower; however, I was a week early as the stock has since reversed to trade significantly higher. Two weeks ago I made my best selection with OncoSec Medical (OTCQB:ONCS), a stock that has been roaring higher and one that I think could continue to explode throughout the next month. This week I am looking at a personal long-term favorite, NeoStem (NBS), a stock that has traded lower with recent events but is now at the bottom of a trend.
NeoStem is a large company with a small-cap stock's valuation, operating in three segments. The company's two most notable segments are those developing AMR-001 and its PCT contract manufacturing business. To make a long story short and to avoid the medical jargon, AMR-001 is in late-stage studies and has seen nothing but positive news since development began. NeoStem is a research machine, due to PCT, and AMR-001 almost exactly mimics Baxter's (BAX) successful cell therapy product, but is used with a different delivery to treat a different cardiovascular disease. In the next 12 months data will be read, and if positive (as I expect) NeoStem will prepare for an accessible market of more than $1.2 billion annually.
The PCT segment does cell manufacturing, helps with commercialization, product storage, etc. It has manufactured Dendreon's (DNDN) Provenge, ImmunoCellular Therapeutics' (IMUC) ICT-107, Baxter's CD34 cell therapy, and others from companies such as SOTIO and two new clients who signed this year. Last year the company's revenue doubled, and NeoStem continues to be a small company with massive revenue potential due to these two segments alone.
NeoStem is trading with a 17% loss since April 29 following a public offering. However, it has found a flat trading range over the last week, which is quite impressive due to the fact that many had thought that the company did yet another offering, which was then clarified on Friday as being not true. The company now has enough cash to operate throughout data readout, which should spark optimism among shareholders. Now, with the stock finding a bottom, and efficiency improving with the growth of revenue, I expect to see a push higher in the week ahead.
Low Expectations Bode Well for Future Performance
Amarin (AMRN) had fallen 55% since July 2012 highs as the outlook surrounding its FDA approved product, Vascepa, continued to fall. The reason for the fall was solely speculative, but boosted by weak patents, no partnership, and fears of OTC pressure. As a result, many believe that its peak sales expectations have fallen drastically from north of $2 billion to potentially $500 million. However, the company has had good news of late, including the FDA's acceptance of its NDA for Vascepa used to treat patients with high triglycerides greater than 200mg/dL; it is currently approved for 500 mg/dL.
Once Vascepa's use is expanded, it will clearly increase its market potential. But until then I still think the company's performance has been impressive. The company produced sales of $2.34 million in three months of launch, but showed great trends with more than half of the revenue coming in April. In the first month, Amarin saw 3,224 prescriptions, then in March it added 4,031, and finally in April it grew 4,508 on top of March's scripts to total 11,768 in the one month alone. To me this is a favorable trend, and the stock responded with gains of 6.00%. As a result, after almost one year of large loss, I think Amarin is a stock to watch for gains. Investors might have overreacted to the company not having a partner, and now with sales being produced, speculation can finally be put to rest.
Could This Name Be the Next First Solar?
After Molycorp's (MCP) quarterly report and conference call, I couldn't help but wonder if we might be seeing the second coming of First Solar. The rare earth company has seen its valuation decline 70% in the last year, and 90% from its peak in 2011. However, most stocks have a bottom, and when fundamentals finally exceed lowered expectations, large gains can be created.
Obviously, Molycorp beat expectations, but it was the production ramp-up at Mountain Pass and statements of returning to normal demand levels this year that sparked gains of 30%. Of course, there are still concerns surrounding pricing for the company, but after a year where absolutely nothing went right, signs of improvement can often spark excitement and speculation to create further gains.
In 2011, shares of Molycorp simply rose too fast, but it has arguably fallen just as quickly. For the last year revenue has continued to rise (much like First Solar), yet the problem has been pricing (just like First Solar). The company is not saying that "everything's better," but rather that it sees light at the end of the tunnel. Thus, I say that because of its loss I would watch the stock closely. Its rally on Friday occurred with a lot of conviction, and there may be investors looking to capitalize on the next beaten down stock to rally.
I would like to conclude by patting myself on the back, if I may. For the last two weeks I have included Restoration Hardware (RH) in my weekly article due to my belief that it was cheap and poised to rally. I had said that if I was wrong I would not include it in future articles, and I am thrilled to report that on the very last day of its second week included in "5 Stocks To Watch," RH rallied to post gains of 20%.
All kidding aside, I am not really patting myself on the back, but rather using RH as an example to show that although I believe the stocks in this series are cheap and present short-term upside, I am not a technical trader. I am a fundamental investor suggesting upside based on long-term trends. I believe that each stock in this series is attractive over a period of time, but investors should perform their own due diligence to not only chase immediate gains, but also larger long-term gains.