This list is strictly for the purpose of researching whether or not the companies have viable business models. Although these companies are very risky, based on the current price, they are at reasonable values and offer significant opportunity to outperform the market in the coming year.
|Symbol||Name||Trade||P/E||EPS||Yield||P/B||% from low|
|CSCO||Cisco Systems, Inc.||15.59||12.17||1.28||1.50%||1.8||3.23%|
|URBN||Urban Outfitters, Inc.||31.41||20.58||1.53||0||3.81||8.20%|
Watch List Summary
Sirius XM gets added to Index
On Monday July 11, 2011, Sirius XM Radio (SIRI) was added to the Nasdaq 100 index. The addition of Sirius defies logic, unless there is something about the future prospects for SIRI that the Nasdaq committee knows that we don’t. As is often the case in such situations, SIRI is being added near its 2 ½-year high as opposed to being added when the stock is near the 52-week low.
We’re willing to submit to the idea that somewhere in between these scenarios is the truth. For example, if earnings rise to $0.04 a share and the p/e multiple comes down to 100 by year end 2012, then the stock would be conservatively priced at around $4 a share. However, this is among the rosiest scenarios that could be depicted for this stock at the moment.
SIRI is a speculator’s dream, but it presently relies on the greater fool theory to justify rising another 150% as it had in the last 12 months. Speculators will be richly rewarded for taking unmitigated risk by going long SIRI if earnings doubled or triple. However, with the p/e ratio at 221, nothing less than perfection is expected from SIRI.
Its addition to the Nasdaq 100 gives SIRI a lifeline that didn’t seem to exist. With the wind at its back, the odds increase that the SIRI can perform as some bulls expect. However, going into the fourth quarter of the year, if the stock does not perform as planned, Sirius will be summarily dismissed from the index as quickly as it was added. However, as we said before, maybe the Nasdaq committee knows something we don't, which justifies Sirius being added to the index as opposed to the other 49 companies on their list of eligible candidates.
Nasdaq Fritters Away Significant Opportunity
We’re surprised that, out of the 50 alternatives to add to the Nasdaq 100 index, Sirius XM Radio (SIRI) was the prime choice. After all, if a company with an $8 billion market cap, $0.01 of earnings and 221 p/e ratio was all that could be found, then something must be awry with the Nasdaq selection committee. In the table below, we found four companies that are among the 50 on the list of companies that should have been selected instead of SIRI.
Our suspicion is that SIRI has been added to the index simply as a means to have a position that rivals the recent IPO of Pandora (P). This will certainly give SIRI a boost, but if the post-IPO performance of Pandora (P) is any indication, SIRI's gains could become the Nasdaq 100’s pains.
A simple question arises: “Do you see Sirius XM Radio as the best investment alternative when most major indexes have been in a 2-year cyclical bull market?” Adding Sirius XM Radio to the Nasdaq 100 index under the current conditions shows a lapse in judgment.
On July 12, 2011, Microchip Technology (MCHP) fell 12% on news that prospects for the future weren’t as bright as analysts anticipated. The Wall Street Journal seemed to believe that MCHP’s decline was the “…canary in the [chip]sector’s coalmine.” The decline in MCHP has resulted in 4.19% dividend yield.
The last time that we wrote about MCHP, March 20, 2010, the company was yielding 4.80%. At the time we said of the chip sector:
[the] clustering of companies in a specific industry may indicate that the entire sector is undervalued.
To varying degrees, our assessment was correct. At the 1-year marker after the list of chip stocks was generated, only one stock, Intel (INTC), was unable to provide above average returns. All other chip stocks on our March 20th list generated a minimum of 26%, as indicated in the chart below. In general, March of 2011 has marked the top on the chip stocks mentioned so far with Microchip Technology (MCHP) and Applied Materials giving back the most from their respective price peak.
Despite the large declines by MCHP, the total return for MCHP has been 20.67% as opposed to the unadjusted return of 11.25%. In the case if Microchip Technology, the total return had been 54.85% at the most recent high set on May 12, 2011. Microchip Technology (MCHP) and many of its competitors aren’t out of the woods yet. However, as the dividend yields increase, there becomes little justification for ignoring these stocks.
Google Jumps On Usual Earnings Surprise
On Friday July 15, 2011, Google’s (GOOG) announcement of 36% profit growth resulted in 13% gain in pre-market trading. As we’ve demonstrated before, pre-market trading rules the rest of the trading day. According to the Nasdaq.com website, 651,141 shares traded in the pre-market and Google rose 13.08% or $69.16.
According to S.A. Nelson, the man credited with coining the term “Dow Theory”:
…stocks have recovered after artificial depression and relapsed after artificial advances to the middle point which represented value as it was understood by those who bought or held as investors.
Google (GOOG) was last on our watch list on June 17, 2011. At that time, GOOG was selling for $500 with a p/e ratio of 19 and a p/b ratio of 3. So far, the stock has risen 19% in exactly one month. From our perspective, there is little need to tempt a stock price that, although it can move higher, has already provided greater than 200% on an annualized basis.
Watch List Performance Review
In our ongoing review of the Nasdaq 100 Watch List, we have taken the top five stocks on our list from July 17, 2010 and have checked their performance one year later. The top five companies on that list can be seen in the table below.
In the last year, there were two outliers when compared to the Nasdaq 100 Index. First was Nvidia (NVDA) which soared as high as 150% in the first six months of being on our July 15, 2010 list. On the other end of the spectrum, we have Staples (SPLS) which has languished with losses of more than -20% in the last year. Overall, the top five stocks on our watch list from last year underperformed the corresponding index by -7.43%. Only three of the stocks (XRAY), (FISV) and (NVDA) were able to exceed the returns of the Nadaq 100. The 28% return from (GILD) and -20% from (SPLS) dragged the performance of the top 5 down considerably.
Disclaimer: On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.
Disclosure: I am long TEVA.