by David Sterman
In order to make money in stocks, you've got to invest. Not just money -- you've got to invest time to watch and watch and watch a gathered list of stocks and be ready to pounce when opportunities present themselves. Here are three stocks that have been on my watch list and now look like promising buys.
1. Couer D'Alene Mines Corp. (NYSE: CDE)
At the start of each year, investors fret that this may be the year that China finally cools. But that's been a bad bet recently and I'm betting that this year's China scare will also prove to be unwarranted, despite possible troubles in that country's housing sector. The rest of the economy simply has too much momentum, which is why I agree with commodity bulls that China's insatiable demand for all kinds of metals and minerals will keep this asset class on the rise in 2011.
My favorite current commodities play is Couer D'Alene, an 80-year-old company that is ramping up production of gold, silver, zinc and iron ore. It's been a "show-me" stock lately, as it starts to boost output at some new mines. Shares have fallen 15% since last week, creating a compelling entry point. Although Couer D'Alene has decent exposure to gold, it's first and foremost a play on silver. And demand for silver, especially in industrial applications, looks set to keep rising in 2011. Silver is an excellent electrical conductor, is used as a reflective material, as an anti-bacterial agent, a heat conduit (think rear-window defrost units in cars) and of course, in jewelry.
So why is Couer D'Alene, which is expected to mine more than 20 million ounces of silver by next year, seeing a slumping share price? Because press reports are circulating that silver is due for a bit of profit-taking. It surged to $31 an ounce in early January, has fallen back to $28, and some think it's headed toward the $25 mark.
But silver has plenty of bulls as well. Standard Bank's Bruce Ikemizu told Bloomberg last month that he sees a move to $40 in 2011, citing new industrial applications for the eponymously-colored metal in 2011. Analysts at Deutsche Bank are even more bullish, predicting that silver will rise to $50 in 2011. If that happens, shares of Couer D'Alene would likely double from current levels as analysts sharply elevate their cash-flow forecasts for the company.
Time will tell how the silver trade plays out. It looks like some see roughly 10% downside from current levels, while others see 30% or even 60% upside. This means shares of Couer D'Alene will likely simply tread water in coming quarters (after slumping badly in recent sessions), or see shares rise sharply. Potentially high-reward and moderate risk are an appealing recipe.
2. NuVasive (Nasdaq: NUVA)
I wrote about this stock several times in 2010, most recently noting that the company's suite of back surgery tools enables doctors to more effectively treat patients while lowering the total cost of the surgical process. Insurers increasingly agree. Aetna (NYSE: AET) and United Health Group Inc. (NYSE: UNH) already covered the system, and earlier this week, Cigna (NYSE: CI) and Humana (NYSE: HUM) reversed course and decided to cover surgeries performed using the NuVasive system as well. Shares surged nearly 10% on Wednesday morning, but have subsequently given back most of the gain. That's a compelling entry point for investors that missed the move.
Shares of NuVasive are off roughly 30% since April, in part due to expectations that sales will grow just 10% this year (after having grown at least 48% every year from 2002 to 2009 and a likely additional 25-30% in 2010). The slowdown is in part due to the uncertain health care reimbursement environment. But as noted above, insurers are now getting behind the company and I expect sales growth to re-accelerate back up 15-20% next year, as the company continues to train more doctors on how to use its equipment. International sales efforts are just now getting underway.
These moves could help the bottom-line grow even faster in 2012. Per share profits, which were likely around $1.40 in 2010, may slump a bit this year as the company builds out its infrastructure, but earnings per share (EPS) may rebound and hit a new peak -- perhaps $2 -- in 2012. Put a multiple of 20 on that, and shares would rebound to $40, or 40% above current levels.
3. Cree Inc. (Nasdaq: CREE)
This one's an earnings season casualty. I first wrote about Cree back in October, when shares traded for $48. Shares quickly rebounded to the $70 mark as fears of a slowdown subsequently looked overblown. Yet shares were slammed again this week on-- you guessed it-- fears of a slowdown for this maker of LED lighting. Everything I said about Cree in October still applies: "You want to own Cree for its pole position in an exciting new industry that will eventually generate billions in revenue. Cree's slice of that industry revenue may shrink, perhaps to 20%, as competition builds. Yet a smaller slice of a much larger pie is not a bad thing."
Quarterly results are another story. Cree just delivered tepid fourth quarter preliminary results, missing forecasts by nearly 10%. Cree's end markets are in flux, especially as Chinese rivals looked to steal market share. However, those rivals have developed inferior products that are quickly failing when deployed. In time, the industry's biggest buyers will realize that Cree's longer-lasting LED lights represent the lowest total cost of ownership. More importantly, we're in the early innings for the LED lighting industry.
A number of analysts have downgraded their rating on Cree, noting that the company has lagged forecasts for the past three quarters. "We view these misses as a somewhat extended period of speed bumps over the course of a long journey," note analysts at Sterne Agee, who are sticking by their $87 price target. In my view, Cree can now benefit from a lower threshold of expectations. As the company gets past this lull in sales, shares are likely to look newly-appealing, as they trade for around 15 times lowered fiscal (June) 2012 profit forecasts when cash is excluded.
Shares rebounded quickly after I wrote about Cree in October. I don't expect to see a quick rebound this time around, but instead I see this as a slow and steady rebounder.
Whether it's silver price forecasts, insurer reimbursement changes or an earnings season miss, you need to spot opportunities in a range of areas, identifying where the herd's attention may be misplaced. These three stocks still look set for powerful growth opportunities, despite the near-term noise, and are my favorite three stocks to own now.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.