6 Major Mid Cap Gainers From Thursday and How to Trade Them Now

by: Rash Menaria

The following is a list of six major mid cap gainers from Thursday:

Company Name


% Gain

Valassis Communications



CARBO Ceramics






Gen-Probe Incorporated






Longtop Financial Technologies



Click to enlarge

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

Valassis gained 16.18% on Thurday after reporting Q1 Adj EPS of $0.57 which was $0.05 above the sell side consensus. The upside mainly came as profitability in the Shared Mail segment outpaced expectations. However, Q1 revenue fell short of estimates ($547 mn actual vs $552 mn consensus), largely due to Neighborhood Targeted revenue, leading to the removal of Mid Single Digit revenue guidance for FY11.

EBITDA and EPS guidance was maintained for the full year. There is not much upside left after yesterday’s stock price appreciation and removal of revenue guidance points that the environment still remains challenging. It's best to avoid this one for now.

Carbo Ceramics gained 15.07% after announcing its first quarter results. 1Q11 operating EPS of $1.36 was well above consensus of $1.02. The earnings beat was due to better-than-expected proppant volumes as the company benefited from the recently constructed third manufacturing line in Toomsboro, which quickly ramped up to full production during the quarter.

The fourth line at Toomsboro is on schedule to be completed before the end of this year (adding 250 million pounds of annual ceramic production capacity). CARBO's fundamentals remain strong and its facilities continue to run at near-full capacity to satisfy strong demand in shale plays, especially the increase in oil related plays. The stock is expected to outperform going forward.

Fortinet gained 14.47% yesterday after reporting 1QFY11 EPS of $0.15 (vs. consensus $0.14) and revenues of $90 mn (vs. consensus $87 mn). Q2FY11 guidance for EPS of $0.16-0.17 on revs of $95-96 mn was modestly above consensus expectations of $0.15 and $92 mn, respectively. Fortinet also announced plans for a 2:1 stock split in June. Fortinet’s high end product billings grew 84% Y/Y, reflecting the company's success in penetrating the large enterprise and service provider markets.

The company is gaining market share against Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) in the enterprise market and Juniper (NYSE:JNPR) in the service provider market. Going forward, Fortinet is all set to benefit from the growth of its core UTM (unified threat management) market; moving towards the high-end of the security market; taking share from larger vendors; and benefiting from a larger product refresh cycle around UTM and next generation firewall features. The stock is expected to outperform in the medium term.

Gen-Probe gained 13.47% yesterday after Bloomberg reported that Gen-Probe had hired an adviser to “seek a buyer for the company.” It’s not totally unlikely that Gen-Probe is looking for a buyer given we are at the beginning of several new product cycles (HPV, PANTHER, etc.) and there is a potential threat of a new competitor (Qiagen) in CT/NG starting in 2013.

The closest precedent transactions are QGEN/DIGE (8x revenue, 46x EBITDA) and HOLX/CYTC (8x revenue22x EBITDA), both of which occurred in 2007. If we expect similar valuations, the potential price can be in the low to mid $80s. A buy out by NVS, makes the most strategic sense, given the existing relationship between Gen- Probe and NVS/Chiron for blood screening (~40% of GPRO revenue).

Shutterfly gained 12.31% yesterday after it reported Q1 revenues of $57.2 mn vs consensus estimates of $53.5 mn. SFLY’s revenue growth is comparable to high-growth ecommerce leaders while its valuation still trails them. Given that Shutterfly has established itself as a leader in its industry vertical and its earnings momentum, is likely to further accelerate with the Tiny Prints acquisition getting fully integrated onto the Shutterfly platform by 1Q12, the stock is likely to outperform going forward.

Longtop Financials gained 10.89% yesterday after the company’s management strongly rebutted fraud allegations in a recent Citron Research article. The company also doubled the size of the buyback to $100 million, reaffirmed its March quarter guidance, disclosed that wage inflation is running in line with (not well above) guidance of 15% and argued that its 20-F will get filed on time and with no revisions. It also disclosed that it has information that could be “materially positive” and that has prevented the company from buying back shares in the open market.

LFT shares appear extremely cheap; trading at <~6x CY12E EPS, adjusted for cash. Although there is a chance of fresh salvos from the bear cartel, I would rather go with the management in this case and suggest buying the shares.

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