LOOKING FOR A TURNING POINT
Sometimes the best investment opportunities happen when a company is at a turning point. Maybe sentiment has been so negative that it cannot get worse or maybe a disliked management team is on the way out, but the stock is still priced based on the assumption that they are staying for the long haul. While these are important shifts, maybe the most important turning point is fundamental. Below is a list of companies whose earnings are expected to grow sharply from trailing performance. While some of this expected earnings growth is likely baked into current valuations, there is probably room for upside if the company can fulfill the estimates. Investors should take a closer look at these companies for potential investment opportunities.
EARNINGS ARE EXPECTED TO GROW RAPIDLY
Alcatel-Lucent (ALU)
Trailing P/E: 58.96
Forward P/E: 10.63
We previously wrote positively about the company, listing it among "7 Stocks That Could Outperform a Rally." If the company can fulfill its earnings growth expectations, the stock price could see some substantial upside. The current discount is likely an artifact of the market's skepticism over the company's abilities to cut costs, drive sales growth and improve margins. But considering current valuations, there is clearly substantial opportunity for a stock rally. The price/sales is a skimpy 0.54. Down the road, if the company's struggles continue, a potential catalyst could come from a corporate breakup. This is unlikely in the near term because shareholders and management will want to continue to reap synergies from the recent Alcatel and Lucent merger, but this is something that investors should keep in the back of their mind.
ATP Oil & Gas Corp (ATPG)
Trailing P/E: n/a
Forward P/E: 7.69
The company acquires, develops and produces oil and natural gas in the Gulf of Mexico and North Sea. The company has both fundamental and financial leverage to the upside. Revenues in 2010 were $438.99, still meaningfully depressed from the $618 million of revenues in 2008, but with net proved reserves of 83.9 MMboe in the Gulf of Mexico and 42.5 MMboe in the North Sea, the company is leveraged to higher energy prices. In addition, ATPG's stock price is partially hampered by the company's $1.86 billion in long term debt. As such, an improvement in production, sales and margins will have outsized benefits for the stock price.
Notable shareholders include: Goldman Sachs, DW Investment Management, Aletheia Research & management and Susquehanna International.
Bank of America Corp (BAC)
Trailing P/E: n/a
Forward P/E: 6.17
This is one of the ultimate stocks at a potential turning point. Like many of the other money center banks, BAC is expected to see a substantial increase in earnings in the coming years as loan losses roll off of their books and the normal earnings power of these financial behemoth finally begin to overshadow the hangover from the poor decisions during the housing boom.
For many investors, it may be difficult to buy a stock when it is trading close to multi-year lows, but for fundamental investors, generally speaking, a declining stock price should yield better buying opportunities. The stock trades at nearly half of their book value and their $2.27 trillion of assets on their balance sheet provide tremendous upside potential if they even generate a moderate return on assets of 1%.
Dendreon Corp (DNDN)
Trailing P/E: n/a
Forward P/E: 231.33
The forward P/E doesn't look like much to brag about, considering the company's meager 2010 sales of $48.06 million, this is big news for the $5 billion market capitalization company. Besides, the company's valuations may be rich, but the bull thesis is undeniably compelling. The company's main drug Provenge, is geared towards prostate cancer patients. The company got a huge boost when Medicare and Medicaid decided to fully cover the drug under its labeled use. The company is expected to roughly double their production capacity with the newly approved Orange County facility. While the labeled use is a subset of the massive potential market for prostate cancer medication, the company's production capabilities are the main impediment to higher revenues. The potential revenues from off label use would be substantial.
Netflix Inc (NFLX)
Trailing P/E: 83.18
Forward P/E: 44.29
There are no shortages of Netflix bulls on Wall Street, but for all of the growth potential and excitement, even they must be waiting for the fundamentals to catch up with the investment thesis. The company could be coming into its own. As video streaming increases and pushes NFLX to the forefront of internet usage, revenues have grown to $2.16 billion. The coming months should be telling for investors following the company's announcement that they intend to split the online streaming service from the DVD by mail plan. As a result, the cost to consumers increases from $9.99 per month to around $15.99 per month for both services. On paper, this could test the company's pricing power but it wil also be interesting to see if this move really increases revenues and margins. While DVD by mail is currently more expensive for Netflix, the shift to streaming may force the company into even greater dependence on tenuous contract agreements with movie studios. In June, the Netflix temporarily lost access to new Sony movie content because of a "contract issue." As competitors increase in the video streaming business, Netflix's content costs could rise substantially as they lose bargaining power.
Priceline.com Inc (PCLN)
Trailing P/E: 46.82
Forward P/E: 20.53
The stock price is trading near 52 week lows, but it may suffer from its unusually high nominal stock price. The stock has long traded at seemingly stretched valuations but with a forward P/E of 20.71, the company could be priced to buy as it has quietly developed into a perfect stock for the current marketplace. Not only does it operate exclusively online, it has had sharp revenue growth and sports a large exposure to international consumers in a growing industry. From 2008 to 2010, the company grew revenues by 64% to $3.08 billion. In addition, the gross international bookings increased by 79% in the quarter ending March 31, 2011 from the year ago quarter.
Considering the company's sizeable growth, secular opportunities and international exposure, it is not surprising that George Soros and Steven Cohen both own this stock.
Sirius XM Radio (SIRI)
Trailing P/E: 219.50
Forward P/E: 31.36
We are bullish of Sirius XM Radio. In a world with increasingly expensive bandwidth and content, we think SIRI could continue to grow into its market opportunity. As such, we previously listed the company among "5 Stocks That Could Double in Price." The improvement in financials will be a huge shift for the company which was near bankruptcy during the recent financial crisis. Upcoming catalysts include the stock's possible inclusion into the S&P 500 Index, a looming price increase for their service and the continued strength of the U.S. auto industry.
Disclosure: I own BAC shares
