How to Trade These 4 Large Cap Losers

 |  Includes: BBRY, BBY, CAJ, HTHIY
by: Rash Menaria

The following is a list of four top large cap losers from Friday:

Company Name


% Lost

Research in Motion



Hitachi, Ltd. (ADR)



Canon Inc. (ADR)



Best Buy Co., Inc.



Click to enlarge

Here are some of the specifics about these stocks and what to expect from them going forward

Research in Motion (RIMM), a designer of cell phones and software, dropped 11.23% on Friday after it announced disappointing management guidance for the May quarter. Its revenue guidance for the May quarter was between $5.2 billion to $5.6 billion ( vs. consensus of $5.6 billion). EPS guidance was $1.47 and $1.55 (vs. consensus of $1.65). Analysts were also skeptical of the $7.5 annual EPS guidance for FY12 as it likely incorporated significantly better trends in the back half of the fiscal year. RIMM generates 81% of its profits from handsets and the strong competition in the cell phone market is likely to be a continuing headwind going forward. The shares are not likely to outperform given the high margin pressures and bleak growth prospects. However, downside risk is also limited given that the company is trading at a very low P/E of 8-9x. We remain neutral on the stock as of now. Our thesis would change and we will become more positive if management is actually able to deliver or at least provide a clear pathway to $7.5 in EPS in the current fiscal year.

Hitachi, Ltd. (HIT), a manufacturer of power generation systems, consumer products and automotive systems, was down 4.32% on Friday. It has experienced a 15% fall in its share price since the recent earthquake in Japan, due to damages at seven of its manufacturing plants and an anticipated decline in demand for nuclear power plants going forward. Investors are also worried about any potential liability due to the Fukushima nuclear disaster. However, investor concerns seem a bit overblown. The company’s nuclear power systems sales contributes only 2% to its total sales. It could easily be compensated by an increase in the sales of thermal power systems if Japan migrates to thermal power from nuclear power. Further, similar to the U.S. and other developed countries, under Japanese law, the liability for Fukushima will be borne by the utility company and the government exclusively and not the plant manufacturers. And finally, although concerns about shutdown at its 7 manufacturing plants are valid, their effect is likely a temporary one rather than permanent.

The company is currently trading at a forward P/E of 10, which is very attractive as compared to its historical trading range. Even though the company’s profitability might be affected in the short run; we are bullish on the stock from the long term perspective and suggest that one should use this dip to go long on the stock.

Canon, Inc. (NYSE:CAJ), a manufacturer of printers and cameras, was down by 4.11% on Friday. Like Hitachi, Canon has also seen production shutdown due to earthquake. The company is expected to start production at most of the facilities within a month. However, at the locations where work cannot be started in the next month, the company is considering making use of alternate sites that were not damaged by the earthquake as a means of continuing production. Even though its short term profitability might be affected due to disruption in production operations, its long term growth prospects are firm. The company’s EPS is expected to grow by 30% in FY11. Considering its high net profit growth rate and attractive dividend yield (3.66%), the company looks undervalued at a current forward PE of ~13x and is expected to outperform the markets going forward.

Best Buy, Inc. (NYSE:BBY)
, a retailer of electronic products, was down 3.02% on Friday. It continued its downward trend from Thursday after it guided 2011 EPS of $3.30-$3.55 (vs. cons of $3.56). The company continues to lose market share and it’s past five year annual average growth rate is a mere 2.3% as compared to the retail sector average of 14.58%. Comparable store sales guidance of flat to -3% comps indicates continued challenges that the company is facing. In the near term, the company might benefit from its (slightly) higher inventory position as Japanese supply chain disruptions create an opportunity. Still, it is too little to change the secular downward trend and the market share loss which the company is facing. The stock is expected to continue underperforming going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.