The fallacy of the recent stock market gains are that all stocks have seen substantial gains this year. In reality, a lot of the small-cap, growth stocks struggled to achieve market returns. Typically these high beta stocks would outperform the market during strong periods, but the slow growing economy doesn't help these stocks.
With the economy picking up based on the strong Q3 GDP growth, 2014 could be the year where the market rotates into growth stocks. Too often, investors confuse a rising interest rate as negative for stocks. In reality, it all depends on the level of the rates and the reason for the rate increase. Typically when rates rise from a low base it can be supportive of stocks. The issue really occurs when rates rise from a high level due to inflation fears, a scenario that would indeed choke off stock gains.
When reviewing attractively priced stocks for 2014, groups of stocks happened to cluster into ones starting with the same letter. Instead of focusing solely on an industry or specific sector, this list will link far-flung sectors that might not typically attract the same investment crowd. The list of 'G' stocks is Gafisa (NYSE:GFA), Glu Mobile (NASDAQ:GLUU), and GSV Capital (NASDAQ:GSVC).
These stocks are more concept stocks than anything that investors can spend hours pouring over financials, ratios, or projections. Do you believe in the turnaround story at Gafisa or the ability of Glu Mobile to consistently monetize mobile games? The common thread amongst these stocks is attractive valuations for stocks with major catalysts for 2014. In addition, the chart below highlights that the last two years have been horrible for these three stocks while the Russell 2000 Index has soared over 55%.
Gafisa - Brazilian Homebuilder
Gafisa is a Brazilian homebuilder that had all the potential of helping develop the housing market in Brazil where the nation lacked adequate housing levels. The company though struggled from high debt levels and cost overruns on development projects. The housing market has continued to soar without the homebuilders into potential bubble territory in the major Brazilian cities in part due to the limited supply provided by the likes of Gafisa.
Gafisa has executed a massive turnaround project over the last couple of years to refocus the Gafisa brand on the Sao Paulo and Rio de Janeiro markets and sell 70% of Alphaville. These moves are designed to improve margins and reduce debt to equity down to a more manageable 50% range.
In a recent Investor Day presentation, management guided for 2014 housing launches of R$1.5 -1.7 billion for the Gafisa brand and R$600 - 800 million for the Tenda brand. The company is guiding towards leverage of 55% to 65% to generate a return on profitability employed in the range of 14% - 16%.
Now that the turnaround is almost complete, the company needs to show that the strategic plans for focusing on profitable growth can actually be implemented. Despite a substantial rise in interest rates in Brazil, the demand for housing remains strong due to limited housing supply and low mortgage debt levels. As the slide below highlights, the stock trades considerably below book value while the premium peers trade at levels of around 1.5x book.
If Gafisa has indeed turned around operations, the stock could be in for a huge run in 2014.
Glu Mobile - Mobile Game Developer
The mobile game developer is ending 2013 on the backs of the most successful game launch in history. Even three months after the release, Deer Hunter 2014 remains a top grossing game on charts. According to AppAnnie.com it still sits in the top 10 on the domestic iPhone charts. The stock had a huge run into year end only to selloff in the last week of trading. It now offers a compelling valuation at a valuation below $300 million with revenue expected to jump above $120 million and likely much higher in 2014. The real question will be whether the game developer is achieving the huge success on the Deer Hunter game profitably or paying tons of money to acquire game players.
Investors need to be keen to watch the progress in releasing several promising games by the end of the first quarter. The biggest frustration for investors is that the company has yet to release another game in full force since the successful release of Deer Hunter back in Sept. Eternity Warriors 3 recently hit the app store in China to much success and Spellista was the first game developed for Google Glass, but investors are still waiting on a full scale release on a major platform. Another solid hit from a franchise in 2014 could push Glu to significant stock gains for the year.
Upcoming releases for Robocop, Motocross Meltdown, and Frontline Commando 2 provide huge promises for 2014, yet the company has to release the games on time before it spends millions in extra expenses. A successful list of games could easily push 2014 revenue up to $150 and a reasonable multiple of 5x revenue would push the stock up to around $10.
GSV Capital - Investment Fund
At this point, GSV Capital has become the way to play Twitter on the cheap. The investment fund that invests in private firms owns 1.9 million shares of Twitter. The shares were bought back a couple of years ago before Twitter made the meteoric rise after going public.
The fund has taken some hits from investments in other recent IPOs that haven't turned out so well including Chegg (NYSE:CHGG) and Violin Memory (NYSE:VMEM). Ultimately the losses in those two investments are minor compared to the huge gains from Twitter. Especially considering Twitter was already the biggest investment even prior to the explosion higher. At the end of Q313, GSV Capital had the following top ten holdings that contributed to a NAV of $13.16:
Considering the Twitter investment was only valued at $23.56 at quarter end, the position has roughly tripled already. While investors are paying attention to the couple of losers, GSV is piling up gains in a couple of other private firms including Palantir Technologies that recently received a valuation nearly double the previous funding price. Presumably this amount would substantially increase the value of the second largest position in the GSV portfolio. In addition, the company owns other appealing positions in Dropbox, Spotify, and SugarCRM to name a few.
Ultimately though, the stock is attractive in the $12 level with the NAV approaching the $17 to $18 range to start 2014. Investors are either leaving a lot of value on the table or betting that Twitter collapses. Either way, the apparent best trade would be going long GSV and shorting Twitter. The social media giant would need to collapse back to the Q3 price in order to justify the current stock price for GSV.
Ironically, the investment thesis on GSV Capital finally played out perfectly with a venture-backed stock soaring out of the IPO to levels that the typical individual investor couldn't have bought at a reasonable value. Instead of GSV soaring in the exiting aftermath of the big score, the stock has actually failed to sustain any momentum. Investors have the potential for a 50% upside based on investments maintaining current levels with upside potential very possible.
These three stocks starting with a G offer huge potential in 2014 after a weak couple of years. The promising catalysts could push the stocks to levels unexpected by most investors. Clearly Gafisa and Glu Mobile offer the highest potential gains if either company executes of the catalysts for the year. GSV Capital provides the ironic situation of where a stock could see substantial gains if it actually does nothing. If Twitter can only maintain its current value, GSV will see a much higher price in 2014. Gains in Twitter and other private firms might just send the NAV higher during the year. Either way, 2014 should be a fantastic year for these stocks.
Disclosure: I am long GSVC, GLUU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.