Given the substantial move of equities over the past two years, traders will likely become more selective in 2011 and focus on those companies that can grow significantly faster than the rest of the market. While there are a multitude of names poised to show strong growth in 2011, many have already seen their stocks move 300-400% over the past 18 months. APKT, FFIV, NFLX and RVBD are some examples, to name a few. As such, we have chosen to focus on ten companies poised for outsized growth, all of which could potentially double over the next year. Admittedly, the stocks of these companies have all recently doubled in the past few months. But it is important to keep in mind that a stock must first rise 100% before it is able to extend its move to 300-400%. As trend-traders, our goal is to be positioned for the next 100% move higher in some of these names. While the reality is they will not all go on to become big winners, if we are right about just two or three of these names, we will be off to a very good start in 2011. Here is our list:
Axcelis Technologies Inc. (ACLS): To understand our bullishness on semi-equipment maker, Axcelis, look no further than the company’s business model. As gross margins scale to the 41% level next year, new investors should warm further to the company’s shares as they realize the tremendous earnings leverage that will be achieved with these margins. Currently, estimates for 2011 call for ACLS to earn $0.24 a share on $368M in revenues. 2012 estimates have recently been increased to $0.50 on $407 Million in revenues. Based on the company’s 1.5 book-to-bill ratio last quarter and a spate of recently announced orders the past few months, we feel ACLS could report 2012’s estimates by next year alone. If all goes right, peak cycle estimates for 2012 could eventually trend toward $475M in revenues and $0.65 in earnings. Add in the $0.50 in cash on its balance sheet to the peak earnings potential of $0.65, and place a 10 P/E multiple on these numbers, you get a double by the end of next year. We remain buyers of ACLS on pullbacks to $3.30-$3.40.
BSQUARE Corp. (BSQR): Yes, BSQUARE has already had quite the move. After reporting a very upbeat quarter in early November, BSQR has exploded to 8-year highs, more than doubling over the past two months. As such, buying in the name should only be done on pullbacks to the high $7s and low $8s.
Despite the recent move in the company’s shares, we remain very bullish on BSQUARE’s prospects for next year. BSQR provides software and engineering services to the smart device marketplace. With demand expected to explode for the company’s services over the next 12-24 months, we feel BSQR could very well earn $0.70 in earnings by 2012. With a limited supply of stock for institutional investors to feed on (BSQR only has 10.3 million shares outstanding), there remains ample room for P/E expansion next year. Place a 20 P/E on $0.70 in earnings and add back the $2 in cash on the balance sheet and you get a $16 stock.
Chart Industries Inc. (GTLS): Kudos to Ole Slorer of Morgan Stanley. On November, 17th, this analyst raised his target price on Chart Industries from $25 to $45. At the time, this call may have seemed excessively bullish considering that the stock was trading at $23.15. However, six weeks later, Ole’s call seems quite prescient, with shares rising 40% since then. Here are his thoughts at the time of the upgrade:
We view GTLS as an attractive play on our ‘global gas surplus thesis’ and are raising our 2011/12 EPS forecast to $1.90/$3.00 from $1.60/$2.15. We believe GTLS is about to embark on a new growth phase, as LNG gains market share within the global energy mix. Modular LNG facilities are lowering the entry ticket to monetize stranded gas while we believe LNG fueling opportunities for larger vehicles are opening new important growth markets. We believe GTLS has an attractive multi-year growth profile and we see upside to recent peak price levels as this new growth opportunity layers on top of the already strong outlook for large-scale LNG and GTL facilities.
Since he has been spot-on with his call so far, we are going to go with Ole on this one. As other analysts begin to raise their earnings estimates for the stock, to match Ole’s numbers, we feel the valuation in the shares will rise throughout next year. Ultimately, we see the potential for investors to pay over 20x 2012’s $3 in potential earnings, by the end of next year – a scenario which would result in a mid-$60’s stock price. Even if GTLS does not double, we still feel the stock has considerable upside next year.
Ciena Corp. (CIEN): Although official earnings estimates have yet to move higher for Ciena, it is our view that institutional investors have already begun to tweak their models well above the current Street estimates. How else can we explain the stock’s recent trajectory in December, on Ciena’s report of in-line numbers? As turnaround stories gain traction, estimates can move up very quickly. In the case of Ciena, we believe the recent strength in the shares reflect the market’s expectation for a strong 2011 and an even stronger 2012. This is a secular shift here and one that should last for the next few years. If all goes right next year for Ciena, current estimates for its 2012 fiscal year could trend from $1.08 to $1.50-$1.75. Should such a scenario develop, expect to see the P/E on CIEN expand over the course of next year. Put a 25 multiple on $1.50-$1.70 and you get a $40 stock.
Exide Technologies (XIDE): To gain an understanding of why it will take a very long time before electric vehicles become economically viable, take a look at John Petersen's articles on Seeking Alpha. Not many are more knowledgeable on this space than John. In particular, we agree with John’s bullish thesis on lead-acid battery maker, Exide, and are even more bullish on the stock than he is. Let us explain.
After emerging from Chapter 11 and after undergoing a multi-year restructuring, Exide has become a much leaner organization. Earnings are now poised to scale over the next two years, especially with the proliferation of stop-start technology within the automotive sector. Although revenue growth will remain in the single digits, the potential for big earnings growth is quite tangible. After reporting a big upside surprise last quarter, forward estimates for Exide were increased by 120%, from $.37 to $.81. Should the company continue to surprise to the upside like we expect it to do, we feel that the market will ultimately reward the company with a much higher valuation, resulting in the potential for the stock to move to the high teens by the end of next year.
Jabil Circuit Inc. (JBL): You have to hand it to Cramer on this one: he has been dead right with his call on electronic manufacturing services (EMS) provider, Jabil Circuit. While many investors were concerned with the company’s exposure to Cisco (CSCO) ahead of its most recent earnings report, Cramer said to buy into the numbers and he nailed it. Jabil trounced numbers and raised guidance handily for the next quarter. Not surprisingly, most analysts quickly followed suit, raising their price targets and estimates on the stock.
Even after moving from $14 to $20 over the past month, we still feel very bullish about buying into JBL at current prices. To understand our bullishness, look no further than the company’s recent conference call, where CEO, Timothy Main, gave the following upbeat assessment on his sector:
So I think you got a condition, Alex, where there is going to be a breed of companies that are more product focused and commodity manufacturing focused, and then you'll have a breed of companies that are more services focused, and customers and DMS providers like Jabil really looking for a partnering relationship, collaborating on global production strategies, and that's an opportunity for a group of companies to really prosper over the next five to ten years. I think it will be very unlike the last five years.
In short, it seems as though JBL has just entered a new multi-year up-cycle. As we move into next year, we expect to see forward estimates for Jabil increase from $2.52 toward $2.75-$3. As estimates trend higher, so will the stock’s valuation. Expect the market to eventually award the company a 13x multiple on 2012 numbers, leaving us with the potential for the stock to trend toward $40 by the end of next year. Even if we are wrong, apply a 10 P/E on $2.75 in earnings power for 2012 and this gives us 35% upside from current levels. Either way, we win.
Kemet Corporation (KEM): A leading manufacturer of capacitors, Kemet is a successful turnaround play poised to morph into a growth story in 2011. Even after a substantial move higher in its shares, KEM’s stock still trades at historically low valuations. After successfully restructuring its Tantalum and Ceramic segments, the F&E side of KEM’s business continues to be a drag on its results. As the company restructures this segment, however, we feel there is room for additional upside to margins and also to forward earnings estimates.
Because of the commoditized nature of its business, KEM does not deserve a high multiple. Nonetheless, if management can execute successfully and post another few quarters of upside, current 2012 estimates of $2.30 a share could ultimately trend to $2.70. Apply a 10x multiple to these numbers and you come away with a $27 stock by the end of next year.
Lecroy (LCRY): Lecroy is a company which supplies oscilloscopes and serial data test solutions for the telecommunications market. With six sequential quarters of revenue growth and a much improved balance sheet after its recent secondary offering, Lecroy enters 2011 on strong ground. Very much like our thesis on Ciena, being long LCRY is a play on a major secular trend: as consumers clamor for faster and additional bandwidth, the demand for Lecroy’s oscilloscopes, which are used for testing telecom networks, should grow quite strongly the next few years.
Lecroy seems to be in a good position to continue growing its top-line by 20-30% in its next fiscal year due to strong order trends. Current estimates call for 8% growth. These numbers seem too low. As a result, instead of earning $1 a share, we envision the company earning $1.35 in its next fiscal year. Give the stock a 15X P/E and, guess what, you get a double from current prices.
Mad Catz (MCZ): After posting record earnings, revenues, and $9 million in free-cash-flow last year, video-game accessory maker, Mad Catz, is poised for another year of record sales and earnings. In addition to benefitting from its exposure to the RockBand 3 video game and an improved consumer, Mad Catz seems poised for an especially strong Christmas quarter because of its affiliation with Activision’s (ATVI) game, “Call of Duty: Black Ops”. To those who may not have heard of this game, take note: Black Ops has already garnered $1 billion in sales since being released in early November.
When Mad Catz began shipping its products for Call of Duty last year, sell-through was very limited due to a lackluster consumer backdrop and hesitation by most retailers to build inventory. This Christmas season was a completely different story. On its conference call in early November, MCZ’s CEO stated:
We’ve seen opening purchase orders from retailers for our upcoming Call of Duty Black Ops product range exceeds the life to date sales of the successful Modern Warfare 2 product line.
This statement is very significant. It implies that MCZ should see a sizable boost to sales during this Christmas quarter than it had seen from the Call of Duty game last year. Perhaps this is why the company increased its credit line by 40% to $50 million for the Christmas quarter?
Based upon this momentum and on the overall tenor in the company’s business, we see Mad Catz earning $.16-$.18 per share on revenue of $80 million in this year’s Christmas quarter. For the year, MCZ could very well earn $.18-$.20 and be profitable in 3 of its 4 quarters. This would be a first for the company and a big step forward in garnering the company a higher multiple from the market. Trading for a forward P/E of 5 and with expected earnings growth of over 150% this fiscal year, Mad Catz seems to offer the potential for significant upside from its current price of $1. We remain buyers at current prices.
QuePasa.com (QPSA.OB): Social network, Quepasa.com, should see its valuation move considerably higher in 2011. Currently, the company is scaling its membership by 10% a month. In a certain sense, an investment in QPSA is a back-door play on Brazil’s economic growth, with most of its new members coming from this country. With indications building for an earlier-than-expected I.P.O. by Facebook in 2011, at some juncture we expect QPSA to go parabolic as investors seek secondary plays in the space. A move to $25 is a distinct possibility for a social network poised to scale to 50 million members by the end of next year. Such a move would still only value the shares at $12 a member.
The stock is too extended to buy, however, in the near-term. Wait for pullbacks to $10.5-$11 before initiating a position in the name.