On a typical day, there may be dozens of upgrades, downgrades, and initiations of coverage. Yet, only handfuls are what I would consider meaningful or "good." Others move stocks, but do not provide any new information or make calls based on channel checks. There are also plain "lazy calls," which are those that "follow-the-leader," or make calls based on the direction of the stock and or the leadership of other analysts.
Those that are meaningful offer something new, or make a forecast against the trend, and base their decision off-channel checks with real reasons for the call. These are the ones that not only move stocks, but also indicate the true value in a stock, and should be taken very seriously as part of your own due diligence. In this article, I am looking at five such calls from the last week.
Lumber Liquidators (LL)
June 17, Piper Jaffray raised its price target from $90 to $97, saying that "Lumber Liquidators has the potential to be one of the strongest growth stories in retail". Analyst Peter Keith cites "accelerated market share gains, improvement in operational efficiency, healthy industry backdrop, and a compelling new store format."
What Makes It "Good?"
The full-year EPS consensus for next year is $2.88, but Piper Jaffray is predicting earnings of $3.22. What makes this meaningful is that it is based on the fact that Lumber Liquidators is growing market share. The company has changed its storefront, and continues to grow rapidly.
During its last quarter, the company grew revenue by 22.5% but earnings grew 92.5%, and Jaffray expects continued CAGR of 30% over the next three years. With that said, you might think a 25% premium on its current price is a bit too excessive. However, Jaffray makes a very thorough and well-researched call - that is based on channel checks - and if its EPS estimates of $3.22 are met, then the stock is sure to trade considerably higher.
Over the last month, Lumber Liquidators has traded lower by 11% after reaching $90. The stock has seen an incredible five-year 420% return, but I believe it is simply the start of an even larger trend higher. I expect Lumber Liquidators to become a significant player in the home improvement space, and that it will soon surpass its current 52-week high above $90.
BlackBerry (NASDAQ: BBRY)
Aside from Apple, no other stock has been more researched than BlackBerry among analysts. With earnings on Friday, the analysts are in full swing. Over the last week, five different research firms have boosted expectations for the company, predicting a solid showing for its first quarter post-BB10 launch. Here is a summary below:
Q1 BB10 Shipments
Q1 EPS Expectations
What Makes It "Good?"
I have no idea whether or not earnings will exceed BB10 estimates or if it will disappoint. However, the logic behind these calls is quite powerful, which are reasons that you might not consider.
For example, each analyst acknowledges that demand for BB10 in the U.S. is weak, but that demand in the U.K., Canada, and Middle East has been particularly strong. Hence, the stock is not appropriately valued for the overall demand and success of BB10.
Back in Q3 of last year, expectations for BB10 shipments were ranging from 3.5 million to 5.0 million for this last quarter, but expectations have since fallen. Now, after a period of countless downgrades in May, these five analysts are coming out with their bullish calls ahead of earnings; and all are basing their calls off "global" channel checks (unlike most). This fact makes these calls "good," and worth your due diligence, because with 32% short interest, BlackBerry could see significant gains if these analysts are correct.
Krispy Kreme Doughnuts (NYSE: KKD)
Longbow raised the price target on Krispy Kreme from $20 to $23, citing accelerated same-store sales following the firm's channel checks.
What Makes It Good?
As I explained, what makes a call "good" is when something new is introduced to the market, or information that is not valued into the stock is presented. After performing its own research, Longbow is expecting comparable store sales to grow 8.2% year-over-year, which is far greater than expectations of 7.5%.
Clearly, if comparable store sales grow 0.7% more than analysts expect, then both revenue and income will most likely be above the consensus. This is a company that has seen 18 consecutive quarters of increased comp growth, but saw its growth kick into overdrive during its most recent quarter.
Already, many have begun to wonder whether or not Krispy Kreme's Q1 was a one-hit wonder, but in fact, the company might be guiding conservative compared to its current fundamental performance. The stock has rallied 90% in 2013, and I would watch it closely; if Longbow's checks are correct, we are likely to see the stock reach $23 fairly soon.
June 24, Aegis Capital upgraded a company that is rarely ever covered, NeoStem, giving it a $2.5 price target and a "buy" rating. The firm acknowledges that NeoStem is an undervalued play on stem cell therapy with its four different platforms; including its lead candidate AMR-001. Aegis says AMR-001 has "tremendous potential" and with data early next year, positive results could land the company a partnership with Baxter.
What Makes It "Good"?
Aside from the fact that most have never heard of this $100 million company, Aegis' reasons for the call are on target. According to the company, AMR-001 has peak sales potential of $1.3 billion for the repair of heart muscle function following an acute myocardial infarction. With most biotechnology companies trading at 2-3 times peak sales following strong data, NeoStem is deeply undervalued, if in fact data is positive.
In regards to Baxter, this is a side-story that not many people realize. NeoStem's manufacturing business already works with Baxter in developing its Phase 3 cell therapy product. Therefore, a partnership already exists. Moreover, Baxter and NeoStem's cell therapy products are almost the same in terms of structure, with both treating cardiovascular disease, and Baxter's has already produced unprecedented endpoints in a Phase 2 study.
Simply put, this is all mostly new information to investors, making it a good call. Earlier this year, I interviewed another analyst with a bullish target on the stock, who insists that AMR-001's success is not factored into the valuation of the company; yet a potential partnership with Baxter was not discussed. Overall, I think this was a great call for investors who may be looking to add an inexpensive undiscovered biotechnology company that has seen success with its lead product up until this point.
Mellanox Technologies (MLNX)
June 25, Clal Finance gives a bullish forecast including new clients in reference to Mellanox's most recent Q1 conference call. Clal specifically notes the benefits of the company's product InfiniBand and its compatibility with Microsoft's new data center. The key takeaway: Anticipate new deals and a higher stock price.
What Makes It "Good?"
Clal's call on Mellanox is on the borderline of being too speculative. However, it provides enough new information, which includes "special advantages" to InfiniBand, and forgotten comments on the conference call, to qualify as "good."
The fact of the matter is that Microsoft does have a new $677 million data center in Iowa and InfiniBand does become more attractive as a data center grows larger, due to it offering high performance and low latency. Furthermore, Mellanox has already used its products within servers running Microsoft's SQL database, which makes the catalysts for the call possible (even likely).
Clal's call was a speculative yet informative reminder that Mellanox did say that it expects major deals in the second half of this year. Mellanox has been a fallen stock, losing more than 50% of its value from 52-week highs, due to falling demand for InfiniBand. If Mellanox were to land Microsoft as a client and as part of the expansion project, it would most likely bode well for the beaten down stock. Therefore, Clal provided us with a development to monitor over the next several months.
As a rule of thumb, when you are assessing a call, or seeing a stock trade higher following a call, you want to see something more than just a price target. Each and every one of these upgrades, or bullish outlooks, gave us something new with upcoming catalysts that may not be properly priced into each respective stock. To me, this is encouraging, and is what makes a good call. Therefore, I consider each to be among the best of the best during the last week. These coverage calls could be discussed in the future as "being the first" to note a specific catalyst or correctly predict events that led to a higher stock.