Due to Memorial Day, this upcoming week will be shorter than usual, as the markets will be closed on Monday. With that said, opportunity will still present itself during those days - as some stocks are sure to trade higher. Therefore, I am continuing my weekly "5 Stocks To Watch" series, looking at stocks that I believe are poised to trade higher.
Finally, Moving In The Right Direction!
It has been eight months since Apple (AAPL) began its trend lower. During this period Apple has continued to produce lower lows and has consistently traded below its 50-day moving average. However, for the first time since September of 2012, Apple is trading in positive territory for the last three months; and this is just one reason to be optimistic.
Aside from trading with slight gains for the last three months, Apple has traded above its 50-day moving average for all but three sessions during the month of May. For the month, it has returned gains of 9%, almost double the NASDAQ. Furthermore, in the last week it posted gains of 2.74% compared to a loss of 1.13% for the NASDAQ.
Apple has seen recent buying pressure, but there are reasons to believe that it is just the beginning. The stock is still trading at just seven times next year's earnings minus cash. And after months of speculation, analysts are now beginning to "re-buy" into the idea of Apple as a value investment. Last week, Morgan Stanley indicated that iPhone sales are tracking at 31 million units for the June quarter, which is far better than the 27 million consensus. This, combined with the anticipation of new products - and a rising stock price - could lead to much greater short-term gains.
In addition to Apple being cheap, being a cash-cow, and trending higher, there is also added safety associated with the stock. The stock has a yield of 2.75%, which is great among large cap tech stocks, and has a buyback program of $60 billion (recently raised from $50 billion). Thus, shares are being bought in the open market. With all things considered, and using its recent strength as a guide, I think it is very likely that Apple continues to outperform the market and trade higher in the coming week.
This Stock Just Keeps Trending Higher
Since reaching $1.80 back in 2011, bears have been predicting the fall of Sirius XM Radio (SIRI) continuously. Amazingly, those bears still exist, and are still calling for the stock's decline. Yet no matter how many bears exist, this is one stock that simply keeps ticking higher; now trading at multi-year highs.
Since January of 2011, auto stocks Ford (F) and General Motors (GM) have traded with a slight total loss. Meanwhile, Sirius XM has returned gains of more than 150%. The stock has emerged as the clear favorite of those that benefit from a strong auto industry. For those who don't know, Sirius XM is installed in almost all new U.S. manufactured vehicles. The company provides a trial to new vehicle buyers and then hopes to gain those buyers as subscribers when the trial comes to an end.
Sirius XM has excelled in converting new subscribers, and keeping old ones. The company has double digit revenue and earnings growth along with operating margins of 26% over the last 12 months. It is currently trading at 6.50 times sales with a forward P/E ratio of nearly 30. Thus, many believe it is too expensive. However, its growth warrants the premium. And with the auto industry continuing to explode with growth, recent history informs us that Sirius XM will continue to tick higher as well.
Now, Sirius XM reached its current 52-week high of $3.59 back on May 15. The stock then pulled-back to $3.40 - but has since recovered - and is now trading just one penny shy of that high. Therefore, one of two things are going to occur: Either Sirius will pullback once more, or its end-of-day momentum on Friday will carry over into next week and lead to new highs. If so, a $0.15-$0.20 move wouldn't be unimaginable; judging by its performance over the last four years. Personally, I anticipate the new highs. However, I'd be careful, as Sirius could reverse fairly quickly once new highs are created. Hence, this is a volatile stock, trading 122% more volatile than the market, and my suggestion is to either be "long" or avoid all together because of that volatility.
Investors Got This One Right… Initially!
After reporting earnings, shares of Pandora Media (P) exploded with gains of 12% during Thursday's afterhours trading. However, those large gains (including opening gains on Friday) were a bit short-lived, as Pandora reversed to trade lower and closed with losses of 4.25%.
Here's the thing, Pandora's earnings didn't go from good to bad in the blink of an eye. The quarter was solid - it beat on both the top and bottom lines - and investors were right the first time. During the quarter the company saw mobile growth of 47% year-over-year (yoy). However, its revenue from mobile increased 101%. This represents an improvement in monetization, which is what investors wanted to see.
I'll be the first to admit that I was wrong about Pandora. Back in 2011 I said multiple times that the company would not continue to grow and that it would never effectively monetize its listeners. Currently, the company is still growing and is doing a much better job at monetizing that growth. Furthermore, the stock is fairly cheap considering its level of growth.
Pandora is not profitable - but is close - and trades at just 6.75 times sales. Thus, it has significantly better growth but trades at a very similar premium to Sirius XM. In my opinion, Pandora will rise in the week ahead. Far too often the market gets post-earnings reactions incorrect, and when that happens, the stock usually responds fairly quickly to reverse the initial trend.
On a side note, my only concern is the company's market share. During this last quarter its share of U.S. radio listening was 7.33% (up from 5.86% last year). This is a massive share of U.S. radio for just one company. On one side I know that Pandora has room to expand globally, when ready. However, I do wonder how much larger it can grow domestically. On the flip side, I think that because of its share the company makes a very compelling acquisition target. With mobile advertising being such a hot industry, Pandora has a platform that must be attractive to large tech names. Specifically, companies such as Facebook (FB), Google (GOOG), or even Yahoo (YHOO), could find its presence and the opportunity very appealing (something to monitor).
Cheap Stock, Improved Fundamentals, and a Favorable Trend, Equals Short-Term Gains
In 2013 Delta Air Lines (DAL) has been one of the best performing stocks, trading higher by almost 60%. These large gains have been accumulated as the fundamentals have changed within the company; and also in the space as a whole. For one, Delta, among others, increased the domestic flight fees by more than 30% to $200. Last year, these fees along with baggage created much of the industry's growth.
Delta, in particular, is seeing its income grow rapidly, including a $124 million improvement during its last quarter. The company is seeing strong domestic and Latin American growth along with increases in revenue per mile. Overall, the company is executing efficiently, and is seeing improvements in all key metrics of its business. Yet despite these improvements, Delta trades with metrics that are far below the S&P 500 averages. It trades at just 6.31 times next year's earnings (S&P 500 = 14.5) and just 0.43 times sales (S&P 500 = 1.50). In my opinion, this presents a great opportunity.
Looking ahead, Delta is trending higher. Back on May 15 it created new nine year highs at $19.43. The stock then trended lower, and reached a price of near $17.50 last Thursday morning. Since then, it has recovered with authority (much like Sirius) and is now just $0.50 from reaching its current 52-week highs. Therefore, with Delta's trend being almost continuously higher, I think it is very likely that it will continue to trend upwards and will create new highs in the week ahead.
A Single Drug To Change This Big Pharma's Outlook
Bristol-Myers Squibb Co. (BMY) has seen perhaps the greatest pre-ASCO run higher of any other stock in the sector. It has returned gains of 18% in the last month including gains of almost 10% last week. The reason for these gains was a positive abstract, to be presented at ASCO, for its candidate Nivolumab.
Nivolumab is a Phase 3 product that is being developed to treat lung cancer. However, the company is presenting data that combines this candidate with its already approved drug Yervoy in the treatment of advanced melanoma. The reason this is so encouraging is because the abstract shows that when the two drugs are combined, it is actually more effective than Yervoy alone. Thus, the potential indications for Nivolumab alone and in combination with Yervoy is great.
Last week Citigroup upgraded the shares with a new price target of $55. The firm cited that Bristol-Myers' "very broad checkpoint agent" could capture much of growing $24 billion per year market. In addition, Citi also upped Bristol-Myers' 2017 EPS forecast by 31%, which shows the impact that Citi expects Nivolumab to have on the company's fundamentals.
During the last 12 months, Bristol-Myers has accumulated revenue of $16.20 billion. With this new product, the company could see sales increase by 25-30% (according to Citi). As a result, with it being so important to the future of the company, I wouldn't be surprised to see additional buying pressure as ASCO approaches. While it is very rare that big pharma ever has such a market moving catalyst from one drug alone, Nivolumab could very well create a great deal of upside for many years to come with its sales potential being so great.
Every week I like to remind investors that although I am looking at these stocks from a short-term perspective, all outlooks are based on long-term trends. Over the last two months, I have received numerous emails, tweets, and comments that point out the success of prior selections. However, most of which occurred beyond the one week target. This result is due to the fact that my discipline remains a value investor, one who is opportunistic in buying stocks following a pullback.
I am neither a long nor short-term investor, but use price targets after new positions to determine the length of a holding. With this week's list, I see favorable trends with positive sentiment being created for each of these stocks, but wouldn't be surprised if the largest of gains are created in the weeks and months that lie ahead.